PrinciplesofQualityCostsJackCampanella

Campanella,Jack,1934-

Principlesofqualitycosts:principles,implementationanduse/JackCampanella.--3rded.

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"SponsoredbytheAmericanSocietyforQuality,QualityCostsCommitteeoftheQualityManagementDivision."

Includesbibliographicalreferencesandindex.ISBN0-87389-443-X(alk.paper)

I.Qualitycontrol--Costs--Casestudies.2.Serviceindustries--Qualitycontrol--Costs-­Casestudies.3.Manufactures--Qualitycontrol--Costs--Casestudies.1.AmericanSocietyforQuality.QualityCostsCommittee.II.Title.

TS156.C3441999

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Contents

Foretuord.......................................xvPreface.........................................xviiAcknowledgments'.xix

Chapter1QualityCostConcepts1HistoryofQualityCostDevelopment1TheEconomicsofQuality-

aManagementPhilosophy.....................2GoalofaQualityCostSystem....................8TheTaguchiQualityLossFunction(QLF)

andtheHiddenCostsofQuality................12Quality/AccountingInterface15ManagementofQualityCosts17QualityCostsinDefenseContracts19ISO9000andQualityCosts21

ISO900021RelevantISODocuments.....................22EvolutionofISOStandardsPertaining

toQualityCosts22CollectionandReporting

ofQualityCosts24FutureDirections27Conclusion28

vii

ix

858889899091

81818184

Contents

CostofQualityinSmallBusiness.TheCompaniesStudied.ResultsoftheStudy.TheImpactofQualityonSalesRevenue.RecommendationsforMakinganInitial

CostofQualityStudy.ReportingtheCostofQuality.Conclusions.

SoftwareQualityCosts.TheDevelopmentandEconomicsofSoftware.WhatIsSoftwareQuality?.WhyIstheCostofSoftwareQuality(CoSQ)

ImportantNow?91TheApplicationofCostofQualityPrinciples

toSoftware.............................92CostofSoftwareQuality.....................92PotentialBenefitsofUsingCoSQ...............97ElementsofaCoSQEffort97Conclusions~...............102

Chapter5QualifyImprovementandQualityCostReduction103TheQualityCostImprovementPhilosophy103QualityCostsandtheProfitCenter...104ProgrammingImprovement105FindingtheProblemAreas.......................107

TrendAnalysis108ParetoAnalysis............................112

QualityCostAnalysisExample113AbouttheOperation........................113StartingtheProgram........................115

TheTeamApproach125CaseStudyI-ProfitImprovement126CaseStudy2-FailureCostImprovement130

Team-BasedProblemSolving.....................133ImplementationGuidelines141Conclusion141

WorkingwithSupplierstoReduceSupplierQualityCosts141

GainingJustificationfromCustomerSatisfaction142Background143

VIIIContents

QS-9000andQualityCosts-theAutomotiveIndustry..29CostofQuality............................29VDA6.1-theGermanAutomotive

QualityStandard.........................30

Chapter2QualityCostSystemDefinitions31QualityCostCategories.........................31QualityCostElements..........................33QualityCostBases34

OtherConsiderationsPertainingtoBases.........36TrendAnalysisandtheImprovementProcess37

Chapter3QualityCostProgramImplementation45HowtoGetStarted............................45TheManagementPresentation....................47ThePilotProgram.............................48QualityCostEducation.........................50InternalQualityCostProcedure...................52QualityCostCollectionandAnalysis...............54

QualityCostCollection......................54QualityCostAnalysis55

Activity-BasedCosting..........................58QualityCostsandtheAccountingDepartment.....61HowOverheadCostsAreAssigned

toProductsorServices.....................62EnterActivity-BasedCosting..................64UsingActivity-BasedCostingtoIdentifyandAnalyze

QualityCosts66FromCostDriverstoRootCauses..............66UsingABCto'IdentifyQualityCosts69C~mclusion69

Chapter4-UseofQualityCosts.....................71QualityImprovementandQualityCosts71QualityCostsandtheStrategicBusinessPlan.........73SupplierQualityCosts..........................74

HiddenSupplierQualityCosts74ApplicationofQualityCoststoSupplierControl...76ASupplierRatingProgramUsingQualityCosts....77AReturnonInvestmentAnalysis

UsingSupplierQualityCosts................80

XContents

187

205

207

211

111414152339414243

ListofFigures

xi

Qualitycosts-generaldescription..................................5Hiddencostsofqualityandthemultipliereffect7Comparativecostofquality...........................................8Classicmodelofoptimumqualitycosts10Newmodelofoptimumqualitycosts10Failurecostasafunctionofdetectionpointinaprocess.Outputdistributionfromfourfactories.Thequalitylossfunction.Averagequalitylossperpiece.Economicmodel.Costofqualityhistory.Assemblyareaqualityperformance.Qualitycosttrend.Paretoanalysis-machineshop.Assignmentofcostelementsto

51 qualitycostcategories.Qualitycostdataspreadsheet56

57 Qualitycostsummaryreport.Totalqualitycosts...........................................................59Costsrelatedtoquality...................................................60Levelsatwhichcostsareincurred62Materialhandlingmonthlyexpensedata64Internalfailurecostsbreakdown-shaftsandhousings.........................................................67

1.11.21.31.41.51.6

1.71.81.91.102.12.22.32.43.1

3.23.33.43.53.63.73.8

143144149150151

153153155156157

160161163165166169169169170172176

179179179181181181182183183185

BuyerSatisfuction.Payoff.Justification.Investn1ent.Conclusions.

Chapter6Service/SoftwareCaseStudies.Banking.

Introduction.Objective-.GettingStarted.RelationshipofCostofPoorQuality

toDefectsandCustomerSatisfaction".Education.

1.MajorEquipmentReplacementProject.2.TelephoneSystemReviewProject.Conclusion.

SoftwareDevelopment.Introduction.RESandItsImprovementProgram.CostofSoftwareQuality.ExperiencesandLessonsLearned.CaseStudyImplications.

AppendixABasicFinancialConcepts.PrimeCosts".OverheadCosts.CostofGoodsProduced.CostofGoodsSold.RevenuesandProfit.MechanicsofQualityCostCollection.GeneralAccountingPractices.TheBalanceSheet.TheProfitandLossStatement".

AppendixBDetailedDescription.ofQualityCostElements:.

AppendixCBibliographyofPublications:,:-andPapersRelatingtoQualityCosts.-.

References.

Index.

XII

3.94.1

4.2

4.3

5.15.25.35.45.55.65.75.85.95.105.115.125.13

5.145.155.16

:.5.175.185.19

5.205.215.22

5.236.16.26.3

ListofFigures

Causesoffailure68CostofSoftwareQuality(CoSQ)Incontext92Knox'stheoreticalmodelforcostofsoftwarequality..........................................................94Costofsoftwarequalityfor15projectsat.RES95Qualitycostsystem105Profitcenterqualitycosts105Profitcenter'soverallstrategicbusinessplan106Totalqualitycosts109Qualitycosts-totaldollars110Qualitycostsrelatedtobases111Paretodistributionofinternalfailure:112Paretodistributionofscrap113Paretodistributionofremedialengineering113Totalqualitycosts-TransmotorDivision116-117Actualqualitycosts119Qualitycostsasapercentgfnetsalesbilled120Qualitycostsasapercentofcostsofunitsshipped121Qualitycostsasapercentoffactoryhours122Internalfailurecosts123Paretodistributionsofscrap,rework,andr~inedialengineering124Rejectioncauses132Cause-and-Effectdiagram134Thereturnoninvestmentandpaybackperiodworksheet;139Buyerperceptionofquality143Profrleofwhenbuyersinyear0willrepurchase145Buyets'rcurrelTtandprojectedperceptionsofq!1.~ityaftetproposedincreaseincu~omersatisfaction145Gainincontributionmargin149TheBancOnequalityimprovementprocess154Qualitycostreport-installmentloans158Paretodiagram-failures159

6.46.56.6

6.76.86.96.106.116.12A.lB.l

List(1Figuresxiii

Paretodiagram-failureandappraisal159Processimprovem(Jntteammethodology162Costsofquality-DepartmentofFinance,EquipmentandTraining164Estimatedimplementationcosts165Costofquality-beforetelephonesystemreview167Costofquality-aftertelephonesystemreview168RES'sCoSQmodel,171TrackingthecostofsoftwarequalityatRES173TrackingthelevelofsoftwarequalityatRES175Traditionalcostandpricestructure180Detailedqualitycostelementsummary188-189

Foreword

Theyearis1949.ImademyfirstqualitycoststudiesinseveralplantsofGeneralElectric.Now,ahalfcenturylater,wecanidentifysomeusefullessonslearned:

1.Thelanguageofmoneyisessential.Forasuccessfulqualityeffort,thesinglemostimportantelementisleadershipbyuppermanage­ment.Togainthatleadership,wecanproposesomeconceptsortools.Thatisthewrongapproach.Instead,weshouldfirstconvincemanagementthataproblemexiststhatrequirestheirattentionandaction,i.e.,excessivecostsduetopoorquality.Aqualitycoststudy,particularlywhencoupledwithasuccessfulpilotqualityimprove­mentproject,isasolidwaytogainmanagementsupportforabroadqualityimprovementeffort.(Excessivecostisonequality­relatedhotbuttonformanagement;lossofsalesrevenueistheotherhotbutton.)

2.Qualitycostmeasurementandpublicationdonotsolvequalityproblems.Wemustalsoidentifyimprovementprojects,establishclearresponsibilities,provideresourcestodiagnoseandremovecausesofproblems,andtakeotheressentialsteps.Neworganiza­tionmachineryisneededtoattackandreducethe·highcostsofpoorquality.

3.Thescopeoftraditionalqualitycostsshouldbeexpanded.Tradition­ally,qualitycostshaveemphasizedthecostofnonconformances.Importantasthiscostis,wealsoneedtoestimatethecostofineffi­cientprocesses.Thisincludesvariationofproductcharacteristics

xv

xviForeword

(evenoncnfonningproducts),redundantoperations,sortinginspec­tions,andtherformsofnonvalue-addedactivities.Anotherareaisthecostoflosopportunitiesforsalesrevenue.

4.Traditionacategoriesofqualitycostshavehadaremarkablelongevity.bout1945,somepioneersproposedthatqualitycostsbeassignecategoriesoffailures,appraisal,andprevention.Manypractitiones(includingmyself)foundthecategoriesusefulandevendevisdingeniouswaystoadaptthecategoriesbeyondmanu­facturing(uchasinengineeringdesign)andtotheservicesector(suchasinfinancialservicesandhealthcare).

ThislatesteditioofPrinciplesrecognizestheselessonslearned.Theadditionalmateri1onISO9000andQS-9000,Activity-BasedCosting,smallbusinesses,team-basedproblemsolving,softwarequalitycosts,impactonsalesreenue,aswellasthecasestudiesonbankinaeducation b',

andsoftwaredevlopment,havebroughtusalongwayfromtheolddaysofqualitycostinmanufacturing.Wearemovingtowardabroaderviewofqualitycostelementsandtheirapplicationtomanufacturinaandserviceindustriesinboththeprofitandnonprofitsectors:powerful~tuffin1949,powerfulstufftoday.

FrankM.GrynaDistinguishedUniversityProfessorofManagementTheUniversityofTampa

Preface

Howdoesmanagementcurrentlyviewtheimpactofqualityontheresultsoftheirenterprise?Ingeneral,theyareawarethatqualityhassomeimpactoncustomersatisfaction,but,unlesstheyknowthatunhappycustomersarecausinglowersales,somemaynotbedirectlyconcerned.Manyrealizethatqualityhasanimpactonprofits,butthisunderstandingmaybewellfocusedonlywhenrisingcostsareduetomajorqualityproblems.·Man­agement,ingeneral,maynotdirectlytranslatequalityorlackofqualityintoitstrueimpactontheirenterprise,yetunderstandingthisimpactcaneasilyspellsurvivalintoday'smarketplace.Fortunately,duetotheeffortsofmany,management'sunderstandingisimprovingatanacceleratedpace.

Abasiccommitmentofmanagementshouldbetocontinuouslypursuequalityimprovement.Toachievethemosteffectiveimprovementefforts,managementshouldensurethattheorganizationhasingrainedinitsoper­atingprinciplestheunderstandingthatqualityandcostarecomplementaryandnotconflictingobjectives.Traditionally,recommendationsweremadetomanagementthatachoicehadtobemadebetweenqualityandcost,theso-calledtrade-offdecision,becausebetterqualitywouldsomehowcostmoreandmakeproductiondifficult.Experiencethroughouttheworldhasshown,andmanagementisbeginningtosee,thatthisisnottrue.Goodqualityleadstoincreasedproductivity,andreducedqualitycosts,andeven­tuallytoincreasedsales,marketpenetration,andprofits.

Thepurposeofqualitycosttechniquesistoprovideatooltomanage­mentforfacilitatingqualityprogramandqualityimprovementactivities.Qualitycostreportscanbeusedtopointoutthestrengthsandweaknessesofaqualitysystem.Improvementteamscanusethemtodescribethemonetary

xvii

xviiiPreface

benefitsandramificationsofproposedchanges.Returnoninvestment(ROJ)modelsandotherfinancialanalysescanbeconstructeddirectlyfromqualitycostdatatojustifyproposalstomanagement.Improvementteammemberscanusethisinformationtorankproblemsinorderofpriority.Inpractice,qualitycostscandefineactivitiesofqualityprogramandqualityimprove­menteffortsinalanguagethatmanagementcanunderstandandacton--clol­lars.Anyreductioninqpalitycostswillhaveadirectimpactongrossprofitmarginsandcanbecountedonimmediatelyaspretaxprofit.

Thepurposeofthisbookistofurnishabasicunderstandingoftheprinciplesofqualitycosts.Itshouldprovidereaders,fromboththeman­ufacturingandservicesectors,withsufficientunderstandingtodevelopand'implementaqualitycostsystemsuitabletotheirorganization'suniqueneeds.Itisnotintendedtodirectlyaffectthecostaccountingsys­temofanenterprise,butitsusemaysuggestideasthatcanenhancetheeffectivenessofoverallfinancialmanagement.

Acknowledgments

AsaproductoftheQualityCostsCommitteeofASQ'sQualityManage­mentDivision,thisbookwastrulyateameffort.containinginputsandarticlessubmittedandreviewedbytheexpertsthatmakeupitsmember­ship,bothpastandpresent.Theeditorwouldliketothankthefollowingindividualsfortheircontributionstothiswork,

FORNEWMATERIAL:JoanAlliger-forherinputonQS-9000andasQualityCostsCommitteechair,hercontinuoussupportandnudging(inaniceway,ofcourse)

ChuckAubrey-forhiscasestudyonqualitycostsinbanking

DennisBeecroft-forhiscasestudiesonqualitycostsineducationand,asCommitteechair-elect,forvolunteeringtotakeonmanyofthenecessarytasksinvolved

FrankM.Gryna-forhissectiononqualitycostsinsmallbusiness,forhispaperonActivity-BasedCosting,andfortheforewordofthisbook

DanHouston,J.BertKeats,andHerbKrasner-fortheirextensivechapterandcasestudyonwftwarequalitycosts

xix

Inadditiontonewmaterial,thisthirdeditionreliesheavilyoninformationfromfouroftheQualityCostsCommittee'spreviouspublicationsonthesubject.Thebooksandtheeditorsforeachofthesepublicationsarelistedbelow.Individualcontributionsareincludedwithineachofthepublica­tionsthemselvesand,althoughnotrepeatedhere,arenolessappreciated.Thesecontributors,aswellastheeditors,areacknowledgedandsincerelyappreciated.

xxAcknowledgmellts

AprilKingandNickShepherd-fortheirassistanceinmakingthiseditionmoreserviceindustryoriented

WilliamOrtwein-forhissectiononqualitycostsinthedefenseindustry

JimRobison-forhismaterialonteam-basedproblemsolving

JohnSchottmiller-forhissectionsonISO9000andActivity-BasedCosting

WilliamO.Winchell-forhismaterialoncustomersatisfaction

FORPREVIOUSMATERIAL:

•PrinciplesofQualityCosts(firstedition)-JohnTHagan

•PrinciplesofQualityCosts(secondedition)-JackCampanella

•GuideforReducingQualityCosts-WN.Moore

•GuideforManagingSupplierQualityCosts-WilliamO.Winchell

Acknowledgmentsxxi

FrankM.Gryna-who,inadditiontosupplyingthematerialacknowledgedabove,wasthefirstreviewerofcompletedmaterialandprovidedtimelyreviewofeachandeverysectionaftermyediting.Hiscommentsandadvice,enhancedbyhiswealthofexperience,wereinvaluabletothiseffort

HerbKrasner-who,assoftwarequalitycostssubject­matterexpertfortheQualityCostsCommittee'sPrinci­plesTaskGroup,coordinatedtheeffort(besideswritingmuchofthematerial)onsoftwarequalitycosts

JohnSchottmiller-withoutwhoseeditingassistance,reviews,andadvicethisprojectwouldhavebeeninfi­nitelymoredifficult.Johnneverturneddownarequestforhelp,andthereweremany.IdependedonJohnandhealwayscamethroughforme

LAS"f,BUTDEFINITELYNOTLEAS"f,APERSONALTHANKYOUTO:

Mywife,Camille-whosepatience,understanding,andI

support,onceagainenabledthesacrificeofweekendsandeveningssoTHEBOOKcouldbecompleted

Mygran.dchildren,Vincent,Eric,Billy,John,Jacquelyn,Matthew,andRyan-whowouldhavelikedtobeabletospendmoretimewiththeir"pa-pa".Thefeelingwasmutual...I'llmakeituptoyou!

ASPECIALTHANKYOUFORCONTRIBUTIONSWELL~BOVEANDBEYONDTHECALL:

Fran~Alessi-forhiscontinuoussupportprovidingwordsofwisdom,advice,andcounsel,countlessreviewsofandcommentsonthematerial,andforhismanymissedgolfoutingssothatwecouldmeettodiscusswhatwecalledTHEBOOK(andalltheextrapoundshegainedatallthoseworkinglunches)

-_....-~

.-

PrinciplesofQualityCosts

Principles,.Implementation,andUse

ThirdEdition

Chapter1

QualityCostConcepts

HISTORYOFQUALITYCOSTDEVELOPMENTOneoftheearliestwritingspertainingtothegeneralconceptofqualitycostscanbefoundinDr.J.M.Juran'sfirstQualityControlHandbook(McGraw­Hill,1951).ChapterI,'TheEconomicsofQuality,"containedDr.Juran'sfamousanalogyof"goldinthemine."Mostotherpapersandarticlesofthattimedealtwithmorenarroweconomicapplications.Amongtheearliestarti­clesonqualitycostsystemsasweknowthemtodayareW.J.Masser's1957article,"TheQualityManagerandQualityCosts,"HaroldFreeman's1960paper,"HowtoPutQualityCoststoUse,"andChapter5ofDr.A.V.Feigenbaum'sclassicbook,TotalQualityControl(McGraw-Hill,1961).Thesewritingswereamongthefirsttoclassifyqualitycostsintotoday'sfamiliarcategoriesofprevention,appraisal,andfailure.

InDecember1963,theU.S.DepartmentofD~fenseissuedMIL-Q­9858A,QualityProgramRequirements,making"CostsRelatedtoQual­ity"arequirementformanygovernmentcontractorsandsubcontractors(seepage38,QualityCostsinDefenseContracts).Thisdocumenthelpedtofocusattentionontheimportanceofqualitycostmeasurementsbutpro­videdonlyageneralapproachtotheirimplementationandlise.Itdid,however,elevateinterestinthesubjectofqualitycosts.

Morerecently,withtheinternationalpopularityoftheISO9000andQS-9000standards(seepages21-29and29-30),qualitycostscontinuestotakeitsrightfulplaceasaqualityimprovementtoolandameasureofqualitymanagement.

1

Uk

THEECONOMICSOFQUALlTY­AMANAGEMENTPHILOSOPHY

Asanexpression,"theeconomicsofquality"-hascontributedtosomecon­fusionsUHoundingthetruebusinessandeconomicvalueofqualityman­agement.Therearethosewhobelievethereisno"economicsofquality"­thatis,itisnevereconomicaltoignorequality.Attheotherextremearethosemanagerswhobelieveitisuneconomicaltohave100percentqual­ity.Thesemanagersfeelfreetomakearbitrarydecisionsabouttheneeded

.~-

3 QualityCostConcepts

.;;a.£i.~.

qualityofaproductorservice,usuallyexpressedbytheterm"that'sgoodenough."Whileitmightappearthateitheroftheseattitudescouldcreateaproblemformanagement,therealdilemmaoccurswhenmanymanagers,supposedlyworkingtogether,operatewithvaryingdegreesofthesediver­gentviewsonquality.Thissituationwillguaranteethatqualityneverachievesitsoptimumroleintheaccomplishmentofbusinessobjectives.

Becauseofitsdirectrelationshiptotheeconomicsofquality,regard­lessofhowoneviewsit,the"costofquality"isanothertermthathasinadvertentlycreatedconfusion.AmongthekeypointsemergingfromtheNationalConferenceforQuality(J982)wastheideathatthe,phrase"costofquality"shouldneverbeused,sincequalityisprofitable,notcostly.I

Someindividuals,includingH.J.Harrington'andFrankM.Gryna,Jlabelitas"poorqualitycost,"orthe"costofpoorquality."TheDepartmentofDefensehasreferredtoitas"costsrelatedtoquality."4Thistextwillcon­tinuetorefertoitas"qualitycosts"orthe"costofquality,"sincetheyremainthemostfamiliarandwidelyusedterms.Whateveritiscalled,itmustberememberedthatthecostofqualityincludesmorethanjustthe

costofthequalityorganization.Tosettherecordstraightfromthebeginning,let'sstatethefactsabout

qualitymanagementandthecostofquality.Therealvalueofaqualityprogramisdeterminedbyitsabilitytocontributetocustomersatisfacti~n

andtoprofits.Thecostof-qualitytechniquesareatoolformanagementmitspursuitofqualityimprovementandprofitcontributions...

Todeveloptheconceptofqualitycosts,itisnecessarytoestabhshaclearpicture0fthedifferencebetweenqualitycostsandthecostofthequalityorganization.Itisimportantthatwedon'tviewqualit~costsast~e

expensesofthequalityfunction.Fundamentally,everytimework.ISredone,thecostofqualityincreases.Obviousexamplesarethereworkmgofamanufactureditem,theretestingofanassembly,therebuildingofatool,orthecorrectionofabankstatement.Otherexamplesmaybelessobvious,suchastherepurchasingofdefectivematerial,responsetocus­tomercomplaints,ortheredesignofafaultycomponent.Inserviceorga­nizations,obviousexamplesincludethereworkingofaservice,suchasthereprocessingofaloanoperation,andthereplacementofafoodord~r

inarestaurant.Inshort,anycostthatwouldnothavebeenexpendedIfqualitywereperfectcontributestothecostofqualit~.._

AlmostanycompanyfunctioncanberesponSIbleformIstakesotomissionorcommissionthatcausetheredoingofworkalreadyaccom­plished.Thisistheessenceofthefailurecostsofquality.

ChapterOlle 2

TheASQQualityCostsCommitteewasformedinJ961todramatizethemagnitudeandimportanceofproductqualitytothewell-beinaofamanufacturingbusinessthroughmeasurementsofthecostofquality.In1967,thecommitteepublishedQualityCosts-WhatandHO"f'todetail~hatshouldbecontainedinaquality~ostprogramandtoprovidedefin­IlJOnsforcategoriesandelementsofqualitycosts.ThispopulardocumentbecamethelargestsellerofanyASQpublicationuntilitssuccessors,Principles(JfQualityCosts,Jstand2ndEditions,werepublishedandsoldevenmore.

TheASQQualityCostsCommitteeprogressedfromtheseinitialeffortstobecometlie-ASQ'srecognizedauthorityforthepromotionanduseofqualitycostsystcms.Inadditiontosponsoringprofessionaltrain­ingprogramsandannualpresentationsonthesubject,thiscommitteehasalsopublishedGuideforReducingQualityCosts,GuideforManagingSupplierQualityCosts,andQualityCosts:IdeasandApplications,Vol­umesJand2.

In1983,theQualityCostsCommitteejoinedtheASQ'sQualityMan­agementDivision(thennamedtheAdministrativeApplicationsDivision)tobeeomeoneofthedivision'smostactiveandproductivecommittees.

Today,moreandmorecontracts,bothgovernmentandcommercial,arespellingoutqualitycostrequirements-fromthecollectionofscrapandreworkcoststothemostsophisticatedqualitycostprogram.Almostallqualitymanagementconsultantshavequalitycostprogramsasanintegralpartoftheirrepertoire.Serviceindustriesareundergoingmorein-depthscrutinybyconsumerandregulatorygroupsquestioningthevalidityofpriceorratehikes.Inthesetimes,aclearunderstandingoftheeconomicsofqualityandtheuseofaqualitycostsysteminsupp0l1ofqualityimprovementeffortsandthemanagementofqualitymaymakethediffer­encebetweenmaintainingthestatusquoandbeatingoutthecompetition.

TotalQualityCostsThesumoftheabovecosts.Itrepresentsthedifferencebetweentheactualcostofaproductorserviceandwhatthereducedcostwouldbeiftherewerenopossibilityofsubstandardservice,failureofprod­ucts,ordefectsintheirmanufacture.

Figure1.1.Qualitycosts-generaldescription.

Althoughitisrarethatacompanywouldgosofarastoidentifyqual­itycostsdowntothelevelofasecretarycorrectingalettercontaining.amistake,everycompanyliveswithsignificantelementsofcoststhatfitthiSdescription.Unfortunately,significantchunksofqualitycostarenormallyoverlookedorunrecognizedsimplybecausemostaccountingsystemsarenotdesignedtoidentifythem.Asthisisgenerallythecase,itisnottoodi~­ficulttounderstandwhymostcompanytopmanagementsaremoresenSi­tivetooverallcostandschedulethantoquality.Theinterrelationshipof

FailureCostsThecostsresultingfromproductsorservicesnotconformingtorequire­mentsorcustomer/userneeds.Failurecostsaredividedintointernalandexternalfailurecostcategories.

5 QualityCostConcepts

ExternalFailureCostsFailurecostsoccurringafterdeliveryorshipmentoftheproduct,andduringorafterfurnishingofaservice,tothecustomer.Examplesarethecostsofprocessingcustomer'complaints,cus­tomerreturns,warranty<:;Iaims,andproductrecalls.

InternalFailureCostsFailurecostsoccurringpriortodeliv­eryorshipmentoIiheproduceorthefurnishingofaservice,tothecus­tomer.Examplesarethecostsofscrap,rework,reinspection,'retesting,mater­ialreview,anddowngrading.

AppraisalCostsThecostsassociatedwithmeasuring,evaluatingorauditingproductsorser­vicestoassureconformancetoqualitystandardsandperformancerequire­ments.Theseincludethecostsofincom­ingandsourceinspection/testofpur·chasedmaterial;in-processandfinalinspection/test;product,process,orser­viceaudits;calibrationofmeasuringandtestequipment;andthecostsofassoci­atedsuppliesandmatelials.

PreventionCostsThecostsofallactivitiesspecificallydesignedtopreventpoorqualityinproductsorservices.Examplesarethecostsofnewproductreview,qualityplanning,suppliercapabilitysurveys,processcapabilityevaluations,qualityimprovementteammeetings,quality.improYC:Inc:ntprojects,..qualityeduca­tionandtraining.

ChapterOne

Scrapandreworkarecommontermsinmanufacturingcompanies.Theyareevenexpectedinmanycompanies.Whilenotreferredtoinsim­ilarterms,thesamephenomenonoccursintheservicesectorofAmericanindustry.Forexample,insurancepoliciesarerewritten,garmentsareexchangedorrepaired,mealsarereturnedtothekitchen,baggageislost,hotelroomsarenotready.Inotherwords,afailureequivalentexistsforservicecompanies-thatportionofoperatingcostscausedbynonconfor­manceto'performancestandards.

Formalqualitymanagementforservicecompanies·isadirectresultoftherealizationthatqualityisthemajorfactorinmaintainingandincreas­ingtheall-importantcustomerbase.Acomprehensivequalitymanage­mentprogramstartswithmanagement'sunderstandingandsupport.Whetherforamanufacturingoraservicecompany,theprogramincludesestablishmentofperformancestandardsineachareaoftheoperation,monitoringofactualperformance,correctiveactionasrequired,andcon­tinuousqualityimprovement.

Whetherformanufacturingorservice,aqualitycostprogramwilllendcredencetothebusinessvalueofthequalitymanagementprogramandprovidecostjustificationforthecorrectiveactionsdemanded.Qual­itycostmeasurementsprovideguidancetothequalitymanagementpro­gram,muchasthecostaccountingsystemdoesforgeneralmanagement.Itdefinesandquantifiesthosecoststhataredirectlyaffected,bothposi­tivelyandnegatively,bythequalitymanagementprogram,thusallowingqualitytobemanagedmoreeffectively.

Simplystated,L9ualitycostsareameasureofthecostsspecifically...associatedwiththeachievementornonachievementofproductorservice

quality-includingallproductorservicerequirementsestablishedbythecompanyanditscontractswithcustomersandsociety.-:JRequirementsincludemarketingspecifications,end-productandprocessspecifications,purchaseorders,engineeringdrawings,companyprocedures,operatinginstructions,professionalorindustrystandards,governmentregulations,andanyoth~.rdocumentorcustomerneedsthatcanaffectthedefinitionofproductorservice.MorespecificallY,Nualitycostsarethetotalofthecostincurredby"{a)investinginthepreveTUionojnonconformancestorequire­ments,(b)appraisingaproductorserviceforconformancetorequire­ments,and(c)failingtomeetrequirements(Figure1.1).QualityCostsrepresentthedifferencebetweentheactualcostofaproductorserviceandwhatthereducedcostwouldbeiftherewerenopossibilityofsub­standardservice,failureofproducts,ordefectsintheirmanufacture....\

-,....---..-_.__.-----_....__.

quality,schedule,andcostwithoutattentiontothecontraryislikelytobeunbalancedinfavorofscheduleandcost-andoften.unwittinglyattheexpenseofquality.Thisimbalancewillcontinuetoexistaslongastherealcostofqualityremainshiddenamongtotalcosts.Infact,suchaconditioncaneasilysetthestageforastillgreaterimbalancewhenevertherising,buthi.~den,truecost,ofqualit7.growstoamagnitudethatcansignificantlyaffectacompanyscompetItiveposition.

'-7Whenthecostofqualityriseswithoutconstr'aint,oristoleratedattoo~ig~.al~vel,failuretoexposetheconditionwillultimatelybecomeasignofmeffectivemanagement,yetitisentirelypossibleforthisconditiontoexistwith~):lttop~anagel?ent'sawareness.AqualitycostprogramcanprovidespecJflcwarnlllgagamstoncoming,dangerous,quality-related,financialsit­~lations.AnargumentforneededqualityimprovementisalwaysweakwhenItmustdealingeneralitiesandopinions,butitwillbecomeunmistakablyclearwhenacompanysuddenlyfindsitselfinserious,costlyqualitytrouble.

Inthe1980s,competitionfromabroad,particularlyJapan,becamesofiercethatmanyU.S.companiesfounditincreasinglydifficulttostayin~usiness.Qualityplayedanimportantroleinthiscompetition.Ifallthefactswereknown,itishighlyprobablethecompaniesthatfailedhadexcessive,butwell-hidden,qualitycosts.Companiesthatmeasurequalitycostsforthefirsttimeareusuallyshockedatwhattheyfind.

Topreventbeingpassedoverbystrongqualityandpricecompetition~r,inap~sitivesense,toconstantlyimproveyourqualityandcostposi­tIOn,qUalItymustbemanagedinallaspectsofcompanyoperations.Toenhancetheabilitytomanagequality,implementaqualitycostsystem.Qualitycostsystemswerecreatedforthispurpose.

Onthepremisethatanydollarexpenditurethatcouldhavebeenavoidedwillhaveadirectbutnegativeeffectonprofits,thevalueofclearlyidentify­ingthecostofqualityshouldbeobvious.Achievingthisclarityofidentifica­tion,however,ismoreeasilysaidthandone.Arealdangerliesinfindingandcolledingonlyasmallportionofthecostsinvolvedandhavingitrepresentedasthetotal.J'hereareasmanywaysofhidingcostsinindustryasthereare~eopl~withimaginatio~Thisisanalltoonaturalphenomenoninorganiza­tIOnsthatareneverfUllychargedwithallinefficiencies-becausesomeinef­ficienciesare·hiddenandnotmeasured-andthusareabletomaintainanillusionofeffectivemanagement.Inthiskindofindustrialoraanization b,

depm1mentsthatcauseinefficienciesinareasbesidestheirownfrequentlygetoffscot-freebecausetheproblemstheycreate,andtheirresponsibilityforthem,areneverproperlyidentified.Thecostsofhandlingsuchproblemsareburiedinthesamewaythatotherrealqualitycostsareburied-asan

acceptedcostofdoingbusiness.Iftopmanagementhadallthefacts,itwoulddemandthemeasurementandcontrolofsignificantqualitycosts.

Eachidentifiedqualityperformanceproblemcarrieswithitatangiblerecoverycost,whichcanbeassignedavalue.Thisistheessenceofqual­itycostmeasurement.Inacertainpercentageofcases,however,thevalueoftheintangiblecostsentailedmaytranscendthepureeconomicsofthesituation.Forexample,whatisthecostofmissinganimportantmilestoneinaschedule?Qualityproblemsaremoreoftenatfaultherethanotherproblems.Butthemostimportantofallintangiblequalitycostsistheimpactofqualityproblemsandscheduledelaysonthecompany'sperfor­manceimageintheeyesofitscustomers,withallofitsimplicationsfortheprofitpictureandthecompany'sfuture.

Jheeffectofintangiblequalitycosts,oftencalled"hiddenqualitycosts,"isdifficult,ifnotimpossible,toplaceadollarvalueon.\(Seepp.12-15foradiscussionofTaguchi'sQualityLossFunctionforapproxi­mationofhiddenlosses.)Somecompanies,however,havefounda"mul­tipliereffect"betweenmeasuredfailurecostsand"truefailurecosts.WestinghouseElectricCorporation,forexample,reportedthatits"expe­rienceindicatesthatamultipliereffectofatleastthreeorfourisdirectly·relatedtosuchhiddeneffectsofqualityfailure."5,Figure1.2comparestruefailurecoststoanicebergwiththemorecommonlymeasuredfailurecostsasjustthe"tipoftheiceberg."Thebulkoffailurecostsare"hidden"belowthesurfaceandareusuallyresponsiblefor"sinkingtheship~

Thenegativeeffectonprofits,resultingfromproductorserviceoflessthanacceptablequalityorfromineffectivequalitymanagement,isalmostalwaysdynamic.Oncestarted,itcontinuestomushroomuntilultimately

7

Truefailurecosts

Hiddenfailurecosts

Commonlymeasured

failurecosts

QualityCostConcepts

EngineeringtimeManagementtime

ShopandfielddowntimeIncreasedinventoryDecreasedcapacityDenveryproblems

Lostorders

___~_..---r._

Figure1.2.Hiddencostsofqualityandthemultipliereffect.

ChapterOne 6

Figure1.3.Comparativecostofquality.

Adaptedfrom"PrinciplesofQualityCosts"byJackCampanellaandFrankJ.

AnnualQualityCongressTransactions.Milwaukee:AmericanSocieiy/orQu~i~;~~~i?;tj982.

9 QualityCostConcepts

Recentsuccesseshaveresultedinrevisionstotheclassicmodelofoptimumqualitycosts.Previously,preventionandappraisalcostswereportrayedasrisingasymptoticallyasdefect-freelevelswereachieved(Fig­ure1.4).Thereisincreasingevidencethattheprocessesofimprovementandnewlosspreventionareinthemselvessubjecttoincreasingcosteffec­tiveness.6Newtechnologyhasreducedinherentfailureratesofmaterialsandproducts,whileroboticsandotherformsofautomationhavereducedhumanerrorduringproduction,andautomatedinspectionandtestinghavereducedthehumanerrorofappraisal.Thesedevelopmentshaveresultedinanabilitytoachieveperfectionatfinitecosts3(Figure1.5).

Thegoalofanyqualitycostsystem,therefore,istofacilitatequalityimprovementeffortsthatwillleadtooperatingcostreductionopportuni­ties.Thestrategyforusingqualitycostsisquitesimple:(1)takedirectattackonfailurecostsinanattempttodrivethemtozero;(2)investinthe"right"preventionactivitiestobringaboutimprovement;(3)reduceappraisalcostsaccordingtoresultsachieved;and(4)continuouslyevalu­ateandredirectpreventioneffortstogainfurtherimprovement.

Thisstrategyisbasedonthepremisethat

•Foreachfailurethereisarootcause.

•Causesarepreventable.

•PreventionisalwayscheapeJ:

Inapracticalsense,realqualitycostscanbemeasuredandthenreducedthroughtheproperanalysisofcauseandeffect.Asfailuresarerevealedthroughappraisalactionsorcustomercomplaints,theyareexam­inedforrootcausesandeliminatedthroughcorrectiveaction.Eliminationofrootcausesmeanspennanentremoval.Thefurtheralongintheoperat­ingprocessthatafailureisdiscovered-thatis,thenearertoproductorserviceusebythecustomer-themoreexpensiveitistocorrect.Figure1.6isanillustrationofthisconcepttakenfrommanufacturing.Theconceptappliestoserviceaswell.Usually,asfailurecostsarereduced,appraisaleffortscanalsobereducedinastatisticallysoundmanner.Theknowledgegainedfromthisimprovementcanthenbeapplied,throughpreventionactivitiesordisciplines,toallnewwork.

Asstraightforwardasthisapproachmayappear,itcannotworkunlessthereisfirstabasicqualitymeasurementsystemthatclearlyidentifiesthecorrectableelementsofperformancefailureswhichrepresentthebestpotentialforcostimprovement.Suchasystemisdesignedtousethedatafrominspections,tests,processcontrolmeasurementsorevaluations,

L,,,,$<o"'Y

Thecompany'squalitymanagementsystemisdesigned,planned,andorganizedfordefectpreventionandcontinuousqualityImprovement.

costly Less

Themanufacturerorserviceorganizationfindsandcorrectsthedefectsinternally.

costly

ChapterOne

Thecustoroerfindsdefectsinthedeliveredpartsorservice.

Most

o

thecompanyfindsitselfinseriousfinancialdifficultiesduetothetwo­Pro~g~dimpactofanunheededincreaseinqualitycostscoupledwithadechnmgperformanceimage.Managementthatclearlyunderstandsthis,L~ndersta~1ds.theec?~omicsofquality.Fortunately,aready-madeprescrip­tIon.awmtsItsdeCISIon-effectiveuseofaforcefulqualitymanagementandImprovementprogram,fullysupportedbyaqualitycostsystem.

..GOALOFAQUALITYCOSTSYSTEMAsillustratedinFigure1.3,themostcostlyconditionoccurswhenacus­tomerf!Ddsdefects.Hadthemanufacturerorserviceorganizationfoundthed.e~ects,throughmuchinspection,testing,andchecking,alesscostlyc.on~ItlOn:",ouldhaveresulted.Ifthemanufacturingorserviceorganiza­t~onsquaht~p~ogramhadbeengearedtowarddefectpreventionandcon­tlDuOus.q~Ial.ltyImpro~ement,defectsandtheirresultingcostswouldhavebeenmlDlmlZed-obvlOusly,themostdesirablecondition.

Figure1.4.Classicmodelofoptimumqualitycosts.

11

Finalinspection

,..Subsystem/assembly

QualityCostConcepts

Failurecost($)

100

Costsofappraisalplusprevention--...

Qualityofconformance,%

~

U::J

-02Q.

a~'c::J-00001

illQ.~

V>0u

a

ChapterOne 10

Figure1.5.Newmodelofoptimumqualitycosts.

Bothfiguresarereproducedj"romJuran'sQualityControlHandbook,4th"d.by1.M.JuranandFrankM.Gryna.NewYork:McGraw-HillBookCo.,1988.

qualityaudits,andcustomercomplaintsasameasureofc()mpanyperfor­manceandasourceofdeterminingcostreductionprojects.Thismeasure­mentisabasicandimportantpartofqualitymanagement.Thepotentialforimprovementcanbedeterminedbyasystemofaccurateanddepend­ablequalitycostmeasurementandanalysis.

Sinceeverydollarofqualitycostsavedcanhaveapositiveeffectonprof­its,thevalueofclearlyidentifyingandusingqualitycostsshouldbeobvious,Byminimizingqualitycosts,qualityperf0Dllancekvelscanbeimproved.

/"'011IIIII11III---Component

Prevention

Process

Figure1.6.Failurecostasafunctionofdetectionpointinaprocess.

'MaterialforthissectionwasextractedfrompublicationsoftheAmericanSupplierInstitute(AS!),Dearborn,MFs,9

Dr.GenichiTaguchidevelopedTaguchiMethods-combinedengineeringandstatisticalmethodsthatachieverapidimprovementsincostandqual­itybyoptimizingproductdesignandmanufacturingprocesses.TaguchiMethodsarebothaphilosophyandacollectionoftoolsusedtocarryforththatphilosophy.

Taguchi'sphilosophycanbesummedupbythefollowingstatements:

1.Wecannotreducecostwithoutaffectingquality.

2.Wecanimprovequalitywithoutincreasingcost.

3.Wecanreducecostbyimprovingquality.

4.Wecanreducecostbyreducingvariation.Whenwedoso,performanceandqualitywillautomaticallyimprove.

Taguchidisagreeswiththe"conformancetospecificationlimits"approachtoquality.Thedifferencebetweenaproductbarelywithinspec­ificationlimitsandaproductbarelyoutofspecificationlimitsissmall,yetoneisconsidered"good"andtheother"bad."Rather,TaguchiMethodsstriveforminimalvariationaroundtargetvalueswithoutaddingcost.

Taguchidefinesqualityas"...thelossimpartedtosocietyfromthetimetheproductisshipped."Fundamentaltohisapproachtoqualityeno-i­neeringisthisconceptofloss.Whenwethinkoflosstosociety,thin~sthatcometomindincludeairpollutionorexcessivenoisefromacarwithadefectivemuffler.Taguchiviewslosstosocietyonamuchbroaderscale.Heassociateslosswitheveryproductthatmeetstheconsumer'shand.Thislossincludes,amongotherthings,consumerdissatisfaction,addedwarrantycoststotheproducer,andlossduetoacompany'sbadreputa­tion,whichleadstoeventuallossofmarketshare.

Theideaofminimizinglosstosocietyisratherabstractand,thus,dif­ficulttodea,1:withasacompanyobjective.Whenweconsiderlosstosoci­etytobe10f!g-t~r~losstoOurcompany,however,(andthetwoareequiv­alent),the~fimtlOnmayhavemoremeaning.

Aspreviouslydiscussed,qualitycostsareusuallyquantifiedintermsofscrapandrework,warranty,orothertangiblecosts.Aswesawhow­ever,theseconstituteonlythe"tipoftheiceberg"(seeFigure1.2).'

13 QualityCostConcepts

Whataboutthehiddencostsorlong-termlossesrelatedtoengineering/managementtime,inventory,customerdissatisfaction,andlostmarketshareinthelongrun.?Canwequantifythesekindsoflosses?~erhaps,butnotaccurately.Indeed,weneedawaytoapproximatethesehIddena~dlong­termlosses,becausethey'rethelargestcontributorstototalqualItyloss.Tao-uchiusestheQualityLossFunction(QLF)forthispurpose.

bThewaytheQLFisestablisheddependsonthetypeofqualitychar­acteristicinvolved.Aqualitycharacteristiciswhateverwemeas~r~tojudgeperformance(quality).Therearefivetypesofqualitycharactenstlcs:

1.Nominal-the-best(achievingadesiredtargetvaluewithminimalvariation,suchasdimensionandoutputvoltage)

2.Smaller-the-better(minimizingaresponse,suchasshrinkageandwear)

3.Larger-the-better(maximizingaresponse,suchaspull-offforceandtensilestrength)

4.Attribute(classifyingand/orcountingdata,suchasappearance)

5.Dynamic(responsevariesdependingoninput,suchasthespeed

ofafandriveshouldvarydependingontheenginetemperature)

,TheQLFwillnotbedemonstratedforanominal-the-bestqualitycharacteristic.Fromanengineeringstandpoint,thelossesofconcern~re

thosecausedwhenaproduct'squalitycharacteristicdeviatesfromItsdesiredtargetvalue.Forexample,consideranAC/DCconvertingcircuitinwhichtheACinputis110voltsandthecircuitistooutput115~Cvolts.Theoutputvoltageisthequalitycharacteristicofintere~t,and.ItSdesiredtargetvalueis115volts.Anydeviationfrom115voltsISconsId­eredfunctionalvariationandwillcausesomeloss.

Supposetherearefourfactoriesproducingthesecircuitsunderthesamespecifications,115±3volts,andtheiroutputisasshownin:igure:.7.SU~­ posefUltherthatallfourfactoriescarryou~100percentmspectIon~letsevennaivelyassumeit's100percenteffectIve),sothatonlythose~Ieces

withinspecificationsareshippedout.Ifyou'retheconsumerandWIshtobuythecircuitsfromoneofthefourfactories,whichwouldyouchoose,assumingthatthepriceisthesame?.

WhileallfourfactoriesareshippingoutcircuitsthatmeettheengI­neeringspecifications,FactoryNo.4appearstoofferamoreu~iform

product-,--,-thatis,thevariationaroundthe115cvolttargetislessatthISfac­torythanattheotherthreefactories.

ChapterOne

THETAGUCHIQUALITYLOSSFUNCTION(QLF)ANDTHEHIDDENCOSTSOFQUAlITY*

1.£

15

$0.23

4

$143

3

QualityCostConcepts

$048

2USL

112118Y

$0.96

LSL1

Figure1.9.Averagequalitylossperpiece.

QUALITYIACCOUNTINGINTERFACESomecompaniesbelievethataqualitycostprogramwillrequireextensiveaccountingsystemchangesandadditionalstaff.Othersbelievethattheirpresentcostaccountingsystemissufficienttoidentifyallareasrequiringmanagementattention.Unfortunately,accountingsystemswereneverdesignedtodemonstratetheimpactofthequalityofperformance(thoughttobesubjectivemeasurement)onoveralloperatingcosts.Thatiswhymanyofthesecostshaveremainedhiddenforsolong.

Identifyingandcollectingqualitycostsmustbecomprehensiveifthesystemistobeeffective,butitalsomustbepractical.Thecollectiona~d

reportingofqualitycostsshouldbedesignedinconjunctionwiththebasiccompanycostaccountingsystem(seeAppendixA,"BasicFinancialCon­cepts").Iflargeelementsofqualitycostsareincurredbutnotaccuratelyidentifiedwithinthecostaccountingsystem(forexample,scrap,rework,orredesigncosts),estimatesshouldbeuseduntilthesystemcanbeadjusted.

tics,suchastensilestrength,theQLFmaybecomeahalfparabola.Inanyevent,beliefintheQLFpromoteseffortstocontinuallyreducethevaria­tioninaproduct'squalitycharacteristics.Taguchi'squalityengineeringmethodologyisavehicleforattainingsuchimprovements.

TheQLFwasusedtoestimatetheaveragequalitylossfromeachofthefourfactories,asillustratedinFigure1.9.NoticethatthesmallestaveragequalitylosswasobtainedfromFactoryNo.4,thefactorywiththehighestquality.Inshort,theQLFisameasureofqualityiIimonetaryunitsthatreflectsnotonlyimmediatecosts,suchasscrapandrework,butlong­termlossesaswell.

y

4 3 2

USL LSL

ChapterOne 14

L=k(y_T)2

LSLUSL

112118Y

Figure1.7.Outputdistributionfromfourfactories.

Loss$

Target

L=Lossin$'sk=Costcoefficienty=ValueofqualitycharacteristicT=Targetvalue

Figure1.8.Thequalitylossfunction.

Inthiswayofthinking,lossoccursnotonlywhenaproductisoutsidethespecifications,butalsowhenaproductfallswithinthespecifications.Further:it'sreasonabletobelievethatlosscontinuallyincreasesasaprod­uct?eVIatesfurthe.rfromthetargetvalue,astheparabola(QLF)inFigure1.8Illustrates.WhIlealossfunctionmaytakeonmanyforms,Taguchihasfoundthatthesimplequadraticfunctionapproximatesthebehavioroflossinmanyinstances.

SincetheQLFcurveisquadraticinnature,lossincreasesbythesquareofthedistancefromthetargetvalue.Thus,ifadeviationof0.02mmfromthetargetvaluegeneratesa20-centloss,thenadeviationof0.04mmwouldcost80centsandadeviationof0.06mm,$1.80,andsof~rth.Inotherwords,ifdeviationisdoubled,thelossisquadrupled.Ifit'stnpl~d,.thelossincreasesninetimes.Foismallei-the-betterqualitychar­actenstIcs,suchaspartshrinkage,orlarger-the-betterqualitycharacteris-

Managingqualitycostsbeginswithageneralunderstandingandbeliefthatimprovingqualityperformance,asrelatedtoproductorservice,andimprovingqualitycostsaresynonymous(theeconomicsofquality).Thenextstepistorecognizethatmeasurablequalityimprovementcanalsohaveatangibleeffectonotherbusinessmeasures,suchassalesandmar­ketshare.Theproviso,however,isthatqualitycostsmustbemeasured

...-cmdmustreflectcostodostopportunitiestothecompany.Itshouldbefurtherunderstoodthatthecostofqualityisacompre­

hensivesystem,notapiecemealtool.Thereisadangerinrespondingtoacustomerproblemonlywithaddedinternaloperations,suchasinspec­tionsortests.Forserviceoperations,thiscouldmeanmoreoperators.Whilethismaysolvetheimmediatecustomerproblem,itsaddedcostsmay,infact,destroytheprofitpotential.Acomprehensivequalityman­agementprogramwillforcetheanalysisofallassociatedqualitycosts,makingtheseaddedinternalcostsappearclearlyasjustonesteptowardtheultimateresolution-preventionoftherootcauseoftheproblem.

Bynowitshouldbeobviousthataqualitycostsystemhasthepoten­tialtobecomeanexcellenttoolintheoverallmanagementofabusiness.Itcanprovideanindicationofthehealthofmanagementperformanceinmanyareasofacompany.Itwillmeasurethecostoferror-relatedactivi­tiesintheseareas.Aqualitycostprogramshould,therefore,becomeanintegralpartofanyqualityimprovementactivity.Overallqualitycostnum­berswillpointoutthepotentialforimprovement,andtheywillprovidemanagementwiththebasisformeasuringtheimprovementaccomplished.

Asidefrombeinganoverallindicatorofqualityeffectiveness,qualitycostnumbersareanimportantassetintheestablishmentofprioritiesforneededcorrectiveaction.Somecompaniescontinuetolivewithless-than­perfectperformancelevelsbecausetheybelievethatitwouldbemoreexpensivetoimprove.Perhapsthegreatestcontributionofqualitycostsystemsinthisaspectofabusinessisshowingthepayoffforwould-becorrectiveactionsandjustifyingtheiraccomplishment.Forexample,therealprofitabilityofinvestmentinanexpensivenewtool,machine,orcom­putersystemmaybeobscuredbynothavingallthefacts,suchasthecostsofinspection,sorting,rework,repair,andscrapandtheriskofnoncon­formingproduct,service,orinformationreachingthecustomer.

Animportantpartofmanagingqualitycostsisreducingthefailurecosts.Forexample,failurecostscouldbeorganizedinParetofashion(the

ChapterOne

Thiswillbenece~sar~bef"0reareasonablepictureoftotalqualitycostscanbeportrayedasaJustIficatIOnforimprovementaction.Also,ifthesequality­relatedelementsaretobecomeaprimetargetforcostreductionth_

tbb.d.h·,eycanno·eunewitm~theraccounts.Theymustbeclearlyvisible.

F.or.allofthecitedreasons,itisessentialthatboththein-housedescnptt.o~sandtheresponsibilityforqualitycostcollection,compilationand:eportmgbeafunctionofthecontroller'soffice-asaservicetoth~qualItymanageme~tfunction.Acontroller'sprocedureforqualitycostsisnecessarytoprovidecompandfi..... ......_.......y..elDltwnsorestlmatmgtechDlcjueandlocatIOnofelet.h·h' h.mensWitmtecompanymanualofaccounts-thatisall~atISneededtoa~curatelyportraytotalcosttothecompany.Holding'the.ontrollerresponsibleforqualitycostmeasurementwillestablishthreeImportantstandardsforthequalitycostprogram:

•Itwillprovidethestampoffinancialvaliditytotheprogram.

•Itwillassurethatcollectioncostsremainwithinpracticallimits.

•Itwillprovideanopportunityforeffectiveteamworktodevelopbetw~en~hecontrollerandthequalityfunction,withbothorgamzatlonsseekingcostbenefitsforthecompany.

Inreality,itisreasonabletoexpectthatthecontrollerwillnotbeeaaertoha~eastaffthatisalreadyoverworkedaddressanadditionalsystemfortrackmgcosts.Therefore,thepracticalvalueofthequalitycostsystemmustbe"sold"tothedecisionmakers(seechapter3,"QualityCostP_gramImplementation").ro

..Neverthe~ess,aninternalqualitycostprocedurewilldirecttheacqui­~Itl?nofspeCificqualitycostdataneededtosupportthecompany'squal­ItyImprovementstrategiesandgoals.

In.de~~loping~hedetailsofaqualitycostsystem,therearetwoimpor-tantCrItenabyWhIChtob·dd·(1)..ato1t.··f.egUle.recogDlzmgthatqualitycostsare

~0J~~tI~I~p~ovementactionsandmeasuretheireffectivenessand(2)I.nc1udll~gmSIgmficantactivitiesisnotessentialforeffectiveu~efqualItycosts.0

thIf~.lsignifican.tqu.alitycostsarecapturedandused,theobjectiveof.equaItylaccountmgmterface-qualitycostimprovement-b.

tIfiedandrh·caneJUs­..aceompISed.ConSIstencyandintegritywillpayoff.Compar-ISonsWIthothersaremeaningless.Comparisonswithyourownasterformanceare.whatreallymatters.Incrementalimprovementsi:qU~ity­costsarewhatcounts.

QualityCostConcepts

MANAGEMENTOFQUALITYCOSTS

17

19 QualityCostConcepts

Ifthcqualitycostprogramiskeptsimpleandpr~ct.i~al~itwillsUP~Ort

h·nitiativetoimprovequalityinalloperations-thelilltlatlveofaqualIty­

telh...Ii1hrexcellence-drivenmanagementsystem.Therefore,wenmltlayaunc-

~ngaqualitycostprogram,careshouldbetakentoplan.itca:~funytoreachthedesiredobjectives.Aqualitycostprogramneed.notIdentl~y~llelementsofqualitycosts(asdescribedinAppendixB,"DetmledDescnpt:onofQual­ityCostElemen.ts");rathe:~it.shouldconcentrateonthequalItycostele­

mentsmostsigmficantlyaffectmgyourcompany..Judgmentastowhatismostsignificantdependsonmorethanmaglll-

dIthasbeenfoundthatsmallexpensesgeneratedforsomeelements

toe. canbejustassignificantashugeexpensesforotherelements.Inan~event,theprogrammustincludeallmajorqualitycostelements,evenIfsome

hetobeestimated.Aftertheinitialstudy,theprogramcanbereevaluated ~.h·

,drefinedwithadditionaldetailsasnecessary.Formostcompames,tIS~~itialapproachwilldelineatemanyimprovementopportunities.Ma~aging

ualitycostsmeanstoactontheseopportunitiesandreapth~financIal.and;eputationalrewards,aswellasqualityimprovemen:scontamedtherem.

Totalqualitycostsisintendedtorepresentthedifferencebet.weent?eactualcostofaproductorservicea~dwhatthec?stw~uldbe1:q~~~itywereperfect.Itis,aspreviouslyaSCrIbedtoJuran,go.ld.mt~emme,.Justwaitingtobeextracted.Whenyouzeroinontheehmmatlon?ffmlurecostsandthenchallengethelevelofappraisalcosts,notonlyWillyoubemanagingthecostofquality,butyouwillalsobemininggold.

QUALITYCOSTSINDEFENSECONTRAaSInDecember1995,theDepartmentofDefense(DOD)directedthatchangesofexistinCYcontractsbemade,replacingmilitarystandardswithacceptedcommerci~.lstandards.ThroughtheDOD"SingleProcessInitiative",itwassuggestedthatISO9000bethealternativequalitystandardto~lL-Q-9~5~~.

Fordecades,MIL-Q-9858A,QualityProgramReqUlrel~ents(mI­tiallypublishedin1963)hadbeenthequalitystandard.ofchOiceformostcomplexproducts.Itidentifiesqualityprogramre.qUlrementsforDODcontractors.Itrequirestheestablishmentofaquahtyprogramtoassurecompliancewiththerequirementsofthecontract.Proce~ures,pro~esses,andproductsarerequiredtobedocumentedandar.esUb~ecttorevIe:-vbyagovernmentrepresentative.ThequalityprogramISsubjecttot~edisap­provalofthegovernmentrepresentativewheneverthecontractorsproce-

duresdonotaccomplishitsobjectives.

One

v~talfewas?pposedtothetrivialmany)forelimination,startingwithhIghestcostItems.IfthebasicqualitymeasurementsystemofacornD,mvcannotprovidetheidentificationofdefectsorproblemstowhichcostscanbeattached,thefirstcorrectiveactionrequiredistoestablishsystemthatdoes.FailurecostscannotbeprogressivelyreducedwithoutparallelsystemtoassistintrackingdownthedefectcausesforeIiluirlation.Atbest,withoutadefectorproblemreportingsystem,onlythemostousproblen:s,the~o-c~lled"fires,"canbepursued.Thenot-so-obvious~robl~msWIllremam.hIddenintheacceptedcostofdoingbusiness.Iden­tIfi~atIonandresolutIOnoftheseotherwisehiddenproblemsisthefirstmajorpayoffofaqualitycostprogram.

Then~xtstepinmanagingqualitycostsistoanalyzetheneedforcur­rentaJ?praI.salcosts.Arewetakingtoohighariskofexcessivefailurecostsbynotha:mgasufficientappraisalprogram?OrarewespendingtoomuchforappraIsa~,especiallyconsideringtheimprovedlevelsofperformancewehaveachIeved?Qualit~costanalyses,inconjunctionwithriskanalysis,have?eenusedtosetdeSIredlevelsofappraisalactivity.Inamorecon­struct~vewa~,.q.ualitycostanalysesalsohavebeenusedtovalidatethatappra~sala~tIVltIeSarenotasubstituteforadequatepreventionactivities.

LIkefaIlureandappraisalcosts,preventioncostsofqualityareman­agedthroughcarefulanalysisleadingtoimprovementactions.Preventioncostsareaninvestmentinthediscovery,incorporation,andmaintenanceofdefectpreventi?ndisciplinesforalloperationsaffectingthequalityofaproductorservIce.Assuch,preventionneedstobeappliedcorrectly,andnotevenlyacrosstheboard.Muchimprovementhasbeendemon­stratedthroughreallocationofpreventioneffortfromareashavinglittleeffecttoareaswhereitreallypaysoff.

Aquali.tycostprogramshouldalwaysbeintroducedinapositiveman­ner.Ifnot,Itcaneasilybemisconstrued(inanegativesense),sinceitusu­allyexposes.ahighdegreeofwaste,error,andexpenditureswhichareunnecessm:macompanywellmanagedforquality.Forthisreason,itisextremelyl~portantthatallaffectedemployees,startingwithmanagement,?ecarefullymformedandunderstandthatqualitycostsisatoolforimprov­mgtheeconomicsofoperation.Itdoesn'tmatterwhatthestartincynumbersare.V~ationsintheapplicationofqualitycosts,inthebusines~itself,inac~ountlllgsystems,andinoverallperformance,makeeachcompanyum~ue.Therefore,.comparisonswithothersaremeaninglessandmustbe~vOld~d.ThemostImportantnumber,theveryessenceofqualitycostobjec­tIves,IStheamountofmeasurableimprovementfromyeait6year.

18

ISO9000ANDQUALITYCOSTS

isnowpermittedbytheinternationalstandardprovidesthebasestructure

tocontinuallyimproveprocesses,MIL-Q-9858Acontinuestobethespecificationrequiredonsome

Department~fDefensecontractsatthetimeofthepublishingofthiseditionofPrinciplesofQualityCosts.Somecompanieshavenottakenadvantageofthe"sinaleprocessinitiative"andcontinuewithMIL-Q-9858Aonmul­tiyearcont;acts.Whenthecontractsaresatisfied,therequirementwillgrad­uallyphaseoutandbereplacedbyanacceptedcommercialstandard.ThegovernmenthassuggestedTSO·900l-,--andcurrentgovernmentcontractsspecifyISO9001.Foritseffectonqualitycostrequirements,seeISO9000

andQualityCosts,below.

21 QualityCostConcepts

ISO9000Oneofthemoststrikinganduniversaltrendsinthemanagementofqualityinthepastfewyearshasbeenthedrivebybusiness~sofalltypestobecomecertifiedtothequalitysystemstandardpublishedbytheInternationalOrganizationforStandardizationknownasISO9000.Thestandardisidentical(exceptforspellingdifferences)totheEuropeanstandardEN-29000andtheAmericanstandardQ9000,publishedbytheAmericanSocietyforQuality.ISOcertificationisrapidlybecomingaprerequisitefordoingbusiness,notonlyintheEuropeanCommunity

butworldwide.TheISO9000andrelatedstandardsdefineandspecifytheelements

ofaqualitysystem.Thequalitysystemcanbeviewedastheorganiza­tionalstructure,thedocumentedprocedures,andtheresourcesthatanorganizationusestomanagequality.TheISO9000standardsrequireonlythatalltheelementsofthesystembeinplaceandworking.Thequalitysystemmaybehighlyeffectiveorgrosslyineffective.TheISO9000stan­dardsrecommend,however,thattheeffectivenessofthequalitysystembemeasured,Althoughtherearemanymeasurespossible,rangingfromthecountingofdefectstosophisticatedcustomersatisfactionsurveys,themeasuresofmostgeneralinterestarelikelytobefinancial.Moneyistheuniversallanguageofbusinessandisatleastaconsiderationinmostotherenterprises.Forthisreason,theISO9000Standardsrecommendafinan­cialmeasurementofquality.AsstatedinSection6.1ofANSI/ASQCQ9004-1-1994,page7,"Itisimportantthattheeffectivenesso,faqual~ty

systembemeasuredinfinancialterms.TheimpactofaneffectIvequahty

Ingeneral,paragraph3.6ofMIL-Q-9858Arequiresthatsomeformofcostsrelatedtoqualitybemaintainedbythecontractor.Exceptforrequiringtheidentificationofthecostsof"preventionandcorrectionofnonconformingsupplies,"thisspecificationprovideslittledefinitionofaqualitycostprogram'scontent.Itallowsthespecificcostdatatobemain­tainedandusedtobe"determinedbythecontractor."Throughtheyears,however,experienceshowedmostgovernmentagenciesandauditorstobelookingforthetypeofqualitycostsystemdescribedinthis'book.

Theconceptsofthemilitarystandardarebased.onstrongqualitythe­oryandwithstoodchange,despitearadicallychangingmanufacturingenvironment.IntheestablishmentoftheInternationalQualityStandardISO9001,itisnocoincidencethatthemembernationsoftheInterna­tionalOrganizationforStandardization(ISO)reliedheavilyonMIL-Q­9858AtocreatethebaseprinciplesofISO900l.

However,theISOrecognizedthat,asmoresophisticatedoptionsofensuringqualitybecameavailableandproven,governmentstandardsdidnotkeeppacewithchangeandoftenlimitedflexibilitybyprescribingmethodsofexecution.Accordingly,themembernationsapprovedastan­dardthatprovidedallofthekeyrequirementsforhavingasoundqualitysystembutdidnotprovidespecificinstructionsastohowtoachievetheirexecution.Thisconceptallowscompaniestheflexibilitytodeterminehowalloftherequirementscanbesatisfied.

AsthegovernmentalsorecognizedthatMIL-Q-9858Arequiredcan­cellationandthatISO9001isalegitimatealternative,thegovernmentriskinapprovingthisproposalislow,aslongasthecontractorcanensurecon­sistentcompliancetotheinternationalstandard.

.AscompaniesachieveISO9001compliance,andhaveindicatedby~ohcythattheyarededicatedtomaintainingit,therisktothegovernmentISextremelylowthatthecompany'squalitysystem,regardlessofmethodofex~cution,v:illstrayfarfromthefoundingprinciplesofMIL-Q-9858A.~ontmualauditsarerequiredtobeconducted,bothinternallyandbyanmdependentregistrar(ifthecompanychoosestoberegisteredbyaninde­pendentthird-partyregistrar)toensurecomplianceandtomaintaintheregistration.(Itshouldbenotedhowever,thatatthetimeofthiswritinathegovernmentisnotrequiringthird-partyreaistrationandwillcontim~~ .•b

usmgItssyst~m~foversightthroughtheuseofgovernmentauditors.)SuchdedIcatIOntothepreservationofaviablequalitysystemwill

ensurethatproductswillcontinuetoexhibitthehighestintegrityandthatcompanieswillcontinuetomaintainthepublictrust.Theflexibilitythat

systemupontheorganization'sprofitandlossstatementcanbehighlysig­nificant,particularlybyimprovementofoperations,resultinginreducedlossesduetoerrorandbymakingacontributiontocustomersatisfac­tion.",and"Byreportingqualitysystemactivitiesandeffectivenessinfinancialterms,managementwillreceivetheresultsinacommonbusi­nesslanguagefromalldepartments."

•ISO9004-1:1994QualityManagementandQualitySystemElements-Guidelines1oSection6FinancialConsiderationsofQualitySystems.ThisisidenticaltoANSIIASQCQ9004-1-1994.Itwasrevisedfromtheoriginal1987version.

•IS010014GuidelinesforManagingtheEconomicsofQuality­DraftInternationalStandard,1996.

11Thisdocumenthasnotbeen

finallyapprovedandissuedasastandard,asofthiswriting.

23

Increasedelightfactors

QualityCostConcepts

Increasesatisfiers

Reducecostofconformance

Reducecostofnonconformance

Reducedissatisfiers

-----I..~$Investment

I$

Cost

1$ Revenue1------------

Figure1.10.Economicmodel.

0--+------------------

andExternalFailureCosts)-thatis,totraditioQalcostsofconformanceandnonconformance.Thelatterweretargetedf~uction.Inthe1994revision,thefinancialpurviewwasextendedfromtraditionalqualitycoststoallcostsincurredinfulfillingstatedandimpliedneedsofcustomers.Bothcostsofconformanceandcostsofnonconformancearetargetedforreduction.IS010014extendsthedomainof"economicsofquality"(seepage2)onestepfurthertotakeintoaccountincreasingrevenueorotherdesiredbeneficialeffects,aswellasthereductionofcosts.Broadereco­nomicbenefitsareanticipatedbyincreasingcustomersatisfaction,inadditiontoreducingcosts.Financialtrackingofbothisrecommended.Anevolutionof"economicsofquality",compatiblewithTotalQualityMan­agement(TQM)philosophy,hasoccurred.AneconomicsmodeldepictingtheISOapproachisshowninFigure1.10.

ChapterOne 22

RelevantISODocumentsISO9001,9002,and9003describeelementsofqualitysystemspertainingtodesign/development,production,installation,andservicingthatareintendedtobecontractualinnatureandagainstwhichauditsaretobeconducted.These~tandardssaynothingaboutqualitycosts.ISO9004-1,ontheotherhand,isaguidancedocumentprovidingdetailedguidelinesonoverallqual­itymanagement,aswellasinformationrelevanttoimplementingthecon­tractualdocumentsISO9001,9002,and9003.Asofthiswriting,itisinthisguidancedocumentandinitsfollow-onsthatqualitycostsaretreated.Thisshouldinnowaylessentheimportanceofqualitycostsinaneffectivequal­itymanagementsystem.Indeed,theimportantareasofproductsafety,lia­bility,andmarketingarelikewisehandledinthesameguidancedocument.

TherecurrentlyaretworelevantISOdocumentspertainingtoqualitycosts:

EvolutionofISOStandardsPertainingtoQualityCostsTounderstandtherelationshipbetweenthesetwostandards,itishelpfultogobacktotheoriginal1987versionofISO9004-1(ISO9004)andcompareitwiththe1994revision.ItisapparentthatanevolutionhasbeentakingplaceinhowtheISO9000standardsviewfinancialaspectsofaqualitysystem.Intheoriginaldocument,thedomainofeconomicsofqualitywaslimitedtocostsassociatedwithachievingquality(PreventionandAppraisalCosts)andcostsresultingfrominadeqllateqllality(Internal

The.Quality-LossApproach.Thequality-lossapproach,whichweshallconSIdernext,attemptstocapturetheintangibleaswellasthetangiblecosts,orlosses,duetopoorquality.Thetangiblelossesarethecommonlymeasur~dfailure~osts,suchasscrap,rework,andwarrantycosts,shown~s.thetIp?ftheIceberginFigure1.2,page7.IntangiblelossesarethehIddenfaIlurecosts,"suchaslostsalesduetocustomerdissatisfaction,

CollectionandReportingofQualityCostsISO9004-1:1994(theissueasofthiswriting)givesusthreemodelsforapproachingqualitycostsanddoesnotexcludeothers.Therefore,adapta­tionsorcombinationsofthethreearepossible.Inthewordsofthestan­dard,theyarethe

•Quality-costingapproach

•Process-costapproach

•Quality-lossapproach

TheQuality-CostingApproach.Quality-costingistheconventionalapproachofcategorizingqualitycostsasprevention,appraisal,internalfailur~,andexternalfailurecosts(seechapter2,page31).Itisthoroughlydescnbedelsewhereinthischapterandiswellunderstoodandbackedbyawealthofexperience.Preventionandappraisalcosts(costsofconfor­mance)areconsideredinvestments,whilefailurecosts(costsofnoncon­~ormanc~)are.consideredaslosses.ApplyingthisapproachnormallyInvolvesInvestmginarelativelymodestincreaseinthecostofpreventiontoreahz~a~oresignificantreductioninthecostoffailure,andultimatelyareductIOnIncostofappraisalaswell,therebysubstantiallyreducingthetotalcostofquality.Inthisapproach,thosecostsareexcludedwhicharepartofthenormaloperationoftheplantorservice,e.g.,costoflaborasso­ciatedwithmakingtheproductordeliveringtheservice,costofroutine~aintenanceandrepair,depreciationofequipment,carryingcostofInventory,andsoon.Qualitycostsareusuallyreportedasapercentofsomeba~e,suchassalesorproductioncosts(seechapter2,page34).Thisproc~ssISnormallycalTiedoutforanentireorganizationbutcanalsobe~~phe~toan~nd,~vidualproces~.It?ffersarapidmeansofidentifyingboldInthemIne(seepage19mthISchapter)andguidesandmotivates

teamsinqualityimprovement(seechapter5,page125).Aqualitycostprogrambasedon.thisconventionalmodelwillmeettheguidelinesrec­ommendedintheISOstandard.

shownasthesubmergedorhiddenpartoftheiceberg.Thebestwecandoistoestimatethem.AlthoughtheISOstandardleavesittothereadertodecidehowtoquantifyqualitylosses,multipliers,ortheTaguchiQualityLossFunction,havebeenusedtoapproximatetheintangiblequalitylosses.Foradiscussiononthe"hiddencostsofquality,"seepage7.FortheTaguchiQualityLossFunction,seepages12-15.

Althoughthequality-lossapproachpermitsonlyaroughestimateofqualitycostsandismuchlessrigorousthantheotherapproaches,thereareinstanceswhereitmaybetheonlyfeasiblemethodbecauseoflackofavailablecostdata.Inothercases,evenwheresuchdataareavailable,itmaystilloffersomeadvantages.Forprocessesrunningatarelativelylowrejectlevel,theimpactoffurtherimprovementisoftenunderstatedifonlytangiblelossesareconsidered.Becausethequality-lossapproachcom­prehendsintangibleaswellastangiblecosts,agreaterandmorerealisticimpactoffurtherimprovementmaybeapparent.

TheProcess-CostApproach.Theprocess-costapproachlooksatcostsforaprocessratherthanforaproductoraprofitcenter.Theactivitieswithinanorganizationthatarelinkedtogetherandaredirectedtowardfulfillingrequirementsofcustomers(bothinternalandexternal)canbeconsideredaprocess.Ofcoursethetwopreviousapproachescanalsobeusedtogeneratequalitycostsforaprocess.However,theprocess-costapproachisuniquein.thatitsignificantlychangesthedefinitionofcostofconformanceandreallychangesthewayqualitycostsareviewed.Intheprocess-costapproach,thecostsofconformanceandnonconformancearedefinedasfollows:

I.Costofconformance:Thecostsincurredtofulfillallthestatedandimpliedneedsofcustomersintheabsenceoffailure

2.Costofnonconformance:Thecostsincurredduetofailureoftheexistingprocess

Notethat"costofconformance"issignificantlydifferentfromthetradi­tionaldefinitionasusedinthequality-costingapproach.Costofconfor­manceintheconventionalapproachincludespreventionandappraisalcoststoassurethatonlygoodproductorservicereachesthecustomerbutexcludesnormalproductioncostsofrunningaprocess.Theprocess-costapproachlumpstogetherallcostsincurredwhenaprocessisrunningwith­outfailureandcallsthemcostofconformance.Includedarenotonlycostsofassuringquality-suchascostsofprevention;e.g.,processcontrol­butalsocostsofrawmaterial,labor,energy,etc.

25 QualityCostConcepts ChapterOne 24

Theemployeeteamestimatingcostsavingopportunitiesanalyzethevariousstepsinaflowdiagramof.theprocesstodeterminethecon­tributorstocostofconformityand'~eabigopportunityinmodifyingorevenreengineeringtheprocess.Eliminatingnonvalue-addedstepsmayreducelaborby$1.00/lb.andoverheadby$1.59/lb.Usingrecy­cledrawmaterialmayreducematerialcostsby$O.SO/lb.Costsshowninthe"After"columnarenowrealized.Instituting"just-in-time"pro­ceduresmayreduceoverheadevenfurtherbyreducinginventorycarry-

Costofnonconformanceisthetraditionalcostincurredduetofailureoftheexistingprocess,suchasscrapandrework.Definedinthisway,greatercostsavingopportunitiesmaylieinreducingcostofconformancethaninreducingcostofnonconformance.Forexample,greatsavingsmaybeavailablefromcombiningprocessstepsoreliminatingnonvalue-addedsteps.BothtypesofcostsaredepictedinFigure1.10.

Thefollowingsimplifiedexampleisintendedtoillustratethediffer­encesbetweenthequality-costingapproachandtheprocess-costapproach.Consideraprocessproducingaspecialtychemicalpowderthatisrunningata96percenfyield.Assumethecostofproductionforthismaterialis$8.00Ilb.Thetraditionalquality-costingapproachwouldidentifyacostofinternalnonconformanceof$.32/lb.Assumingonlyoccasionalcustomercomplaints,automaticsamplingandtesting,andaminimumamountofengineeringsupport,costsofexternalfailure,appraisal,andpreventionareevenlower.Theemployeeteamestimatingqualitycostsavingopportuni­tiesforthisproductseerelativelysmallopportunity.Theymightstruggletoraisetheyieldbyoneortwopercentagepoints,butthiswouldproduceonlyaIto2percentcostimprovement.Thissituationisnotunusual.

Nowconsideraprocess-costingapproachaspreviouslydescribed.Costsmightbedeterminedtobeasinthe"Before"column.

ingcostsandstoragecosts.Thus,analyzingthecostofconformity,andtheprocesselementscontributingtoit,mayresultinasubstantialcost

reduction.Theprocess-costapproachappearstohavesomepowerfulphilosoph-

icalandconceptualadvantages.Thisisbecauseitallowsthetrackingandreductionofcostsnormallyassociatedwithefficiency,inadditiontothosetraditionallyassociatedwithquality(effectiveness).Theprocess-costapproachmaybeparticularlyeffectivefororganizatio~swhose.qualityimprovementeffortshavematuredtothepointthattangIblequalitycostsarerelativelysmallandothertoolsofTQMarebeingused-forexample,SPC,Just-In-Timeprocedures,cycletimereduction,etc.

Onemayarguethatthesearenotreallyqualitycostsinthetrad.i­tionalsense.However,considerthatmostofthenonvalue-addedstepsmaprocessaretherebecauseofqualityproblems,introducingcomplexityintoaprocess.Processsimplificationcancomeaboutonly.af~erreduc­tionoreliminationoferrors.Inordertoreduceinventory,ehmmatestor­agespace,eliminateexpeditingoforders,andsoon,areductionoferrorsoranimprovementinprocessqualityisnecessary.Insuchcases,increaseinefficiencyorproductivityisadirectresultofanimprovementinquality.Thecoststhattherebyareeliminatedcouldbeconsidered

"hiddenqualitycosts."

FutureDirectionsThenew10000seriesofISOstandardsmoveinthedirectionofTQM.Theyareconcernedwithqualitytechnologyand,likeISO9004,arenotuniversallyapplicableandarethereforenonmandatory.Oneofthesestan­dards,preparedbyISOrrC176,wasISO10014-Guidelines!orManag­ingtheEconomicsofQuality.AlthoughforvariousreasonsthiSdocu~e~tneveradvancedbeyondtheDraftInternationalStandard(DIS)stage,ItISlikelythatitwillbeissuedasanISOTe~hni~alRe~ort,intendedasaninformativeGuidancedocumenttoorgamzatlonsusmgrelatedconfor- b.'

manceandguidancestandards.Anex~mination?f:,t~con~entsgIvesanindicationofthedirectionthat"economicsofqualItyIStakmgamongtheinternationalgroupsconcernedwithstandards..

Thedocumentrecommendsaprocessformanagingthe"economIcsofquality"whichcontainsdualpathstomeasureth~economiceffects.ofaprocess.Onepath(theorganization'sview)conSIstsofthefollowmg

steps:

27 QualityCostConcepts

Process-CostBeforeAfter

Costofnonconfonnance$O.32/lb.$O.3l/lb.Costofconformance

Material$2.00/lb.$1.50/lb.Labor$1.50/lb.$O.50/lb.Energy$1.OOl1b.$1.00I1b.Overhead$3.18I1b.$1.59I1b.

ChapterOne 26

Conclusion

Althoughnotrequiredbymandatorystandards,theroutinemeasurementoffinancialconsequencesisrecommendedbyISOguidelinesasameansofmeasuringtheeffectivenessofaqualitysystem...Severalmeasurement

1.Identifythemainactivities(steps)withintheselectedprocess.

2.Identify,allocate,andmonitorcostsateachstepconsistentwiththeorganization'sexistingfinancialsystem.AnyoftheapproacheslistedinISO9004-thatis,quality-costing,process­cost,or"other",suchaslife-cycle,value-added,maybeused.

3.Produceaprocess-costreport.

Theotherpath(thecustomer'sview)consistsofthesesteps:

1.Identifythosefactorscausingcustomerdissatisfaction,customersatisfaction,andcustomerdelight.

2.Monitorcustomersatisfaction.

3.Produceacustomersatisfactionreport.

Thetwopathsthenconvergeintothefollowingsinglepath:

1.Conductamanagementreview.

2.Identifyopportunities.Thesecouldbeincorrectionorpreventionofnonconformances,incontinuousimprovement,orintotallynewprocessesorproductstoimprovecustomersatisfaction.

3.Conductcost/benefitanalysisofreducingcostsorincreasingcustomersatisfaction.

4.Planandimplementimprovement.

WhiletheapproachoutlinedinISO10014isphilosophicallyappeal­inginthatitconsidersopportunitiesaswellaslosses,inpracticalappli­cationsthereistheriskthat,intryingtomeasureallfinancialconse­quences,inthefinalanalysisnonemaybemeasuredsatisfactorily.Thetraditionalqualitycostapproachworksaswellasitdoesbecauseitissospecific.Thereisadisciplineinassigningcoststoknowncategories.Aswemovetobroaderandbroaderconcepts,suchastotalcostsandfinallytototalbenefitscomparedtototalcosts,welosemuchofthisdiscipline.Thevalueofsuchconceptscannotbeknownuntilmoreexperienceisgainedinapplyingthem.

..QS:9000ANDQUAtITYCOST~THEAUTOMOTIVEINDUSTRY

29 QualityCostConcepts

QS-9000qualitysystemrequirementsdefine

...thefundamentalqualitysystemexpectationsofChrysler,Ford,GeneralMotorsTruckManufacturersandothersubscribingcompaniesforinternalandext~rnalsuppliersofproductionandservicepartsandmaterials.

12

TheapproachtakenwastohaveQS-9000asa

...hannonizationofChrysler'sSupplierQualityAssuranceManual,Ford'sQ-IOIQualitySystemStandardandGeneralMotors'NAOTar­getsforExcellence,withinputfromtheTruckManufacturers.ISO900I:1994,Section4hasbeenadoptedasthefoundationforQS-9000..12

QS-9000appliestoallinternalandexternal~ite~suppl~ingprod~c~ion

materials,productionandserviceparts,orfimshmgservicestoongmalequipmentmanufacturer(OEM)customerssubscribingtoit.

OthercompaniesmayadoptQS-9000,butChrysler,Ford,and.Ge~­

eralMotorscontrolthecontent,withtheexceptionofISO9001,whIChIScopyrightedbytheInternationalOrganizationforStandardiza~ion(ISO).AsurveyconductedjointlybytheAutomotiveIndustryActIonGro~p

(AIAG)andtheAutomotiveDivisionoftheAmericanSocietyforQuahty(ASQ)indicatedanoverwhelmingvoteofconfidenceinthevalueoftheprocessandasubstantialreturnoninvestment.

approachesareavailable.~he.quality-.co~tingapproachisaprovenmeansoftracking,guiding,andmotIvatmgquahtyImprovement.Theoth~rappro~ch~s

arebasedonlessexperiencebuthavetheirownadvantages,particularlymSit­uationsinwhichitisdesirabletoincludeotherTQMconcerns,suchase~­ciencyandcustomersatisfaction.Theselectionofthebestappr?ac~Ulti­

matelywillbebasedonmaturityofqualityefforts,typeoforgamzatlOnorprocess,andotherTQMtoolsappliedcemcurrently.

CostofQualityClause4.1.5oftheQS-9000,3dedition,requiressupplierstodocumenttrendsinthe"CostofPoorQuality",definedinthesamestandardas"Thecostsassociatedwithproductionofnonconformingmaterial.Typicallyqualitymanagementbreaksdownthesecostsinto~~oc.ategor~es:inte~al

failureandexternalfailure."ItfurtherexplainsthatTypically,mformatlOnavailablethroughnormalbusinessfinancialreportingshouldbesufficient

ChapterOne 28

30ChapterOne

toidentifyandmanagethecostofpoorquality."Inaddition,itmentionsthatCostofPoorQualityis"sometimesusedinterchangeablywithCostofNonconformance."ISO9004-1isreferencedforadditionalguidance.

Clause4.2.5.2,QualityandProductivityImprovements,notes"Cost~fPoorQuality"asanexampleofasituationwhichmightleadtoImprovementprojects."Scrap,reworkandrepair"and_"customerdissatis­faction"(otherfailurecosts)arealsolistedamongpotentialopportunitiesforqualityandproductivityimprovement.

VDA6.1-theGermanAutomotiveQualityStandardInEurope,theVerbandDerAutomobilindustriee.Y.(VDA),anassocia­tionofGermanautomotiveOEMsandsupplierstotheGermanautomo­tivemanufacturers,hasissuedqualitystandardVDA6.1,whichincludesasarequirementthecostofqualityguidesin150-9004-1:1994.10Theserequirementsincludenotonlythecostsresultingfromnonconformance­thatis,internalandexternalfailurecosts-butalsothecostsassociatedwithqualityactivitytoassureconformance-thatis,preventionandappraisalcosts.CompaniesregisteredtoVDA6.1mustshowevidencethatasystemisinplacetocollectandevaluatethesecostsandthattheresultsarepartoftheirManagementReview.

Chapter2

QualityCostSystemDefinitions

Almosteverydepartmentofacompanyspendsmoneyonlaborormateri­alsthathavespecificimpactonthequalityoftheproductorservicepro­videdtocustomers.It'sprobablyimpossibletoaccountforallofthesecosts,butattemptstodosohaveledtomanydifferentdescriptionsofferedforthecostofquality.Thischapterattemptstogleanfromthesemanyeffortsthoseelementsofqualitycoststhathaveprovenusefulonabroadscale.

Toassistthereaderindeterminingthemakeupofanindividualqual­itycostsystem,ageneraldescriptionofqualitycostcategorieswillbepre­sented.Thiswillbereinforcedbyadetaileddescriptionofqualitycostelements(seeAppendixB,"DetailedDescriptionofQualityCostEle­ments")tobeapplied,asapplicableandpractical,tothedevelopmentofanindividualprogram.

QUALITYCOSTCATEGORIESAsdiscussedinchapter1,qualitycostshavebeencategorizedaspreven­tion,appraisal,andfailurecosts.Failurecostsarefurtherdividedintointernalandexternalfailurecosts.

Preventioncosts-thecostsofactivitiesspecificallydesignedtopreventpoorqualityinproductsorservices.Examplesincludethecostsofnewproductreview,qualityplanning,suppliercapabilitysurveys,processcapabilityevaluations,qualityimprovementteammeetings,qual­ityimprovementprojects,qualityeducation,andtraining.

Preventioncostscouldbemisinterpretedintwoways:First,applica­tionofthedefinitionofpreventioncostscouldbeunclear.Extraappraisal

31

andfailurecostsmaybeincurredtopreventmoreexpensivefailurecosts(forexample,addedinspectionsandreworktopreventnewlyfounddefectsfromreachingthecustomer).Theseclearlyarenotpreventioncosts.But,inthesamesense,costsincurredtosolveproblems(correctiveactionorfailureanalysiscosts)canbeviewedaspartofeithertheprob­lemcost(failurecost)orthecostincurredtopreventtheprobleminthefuture(preventioncost).Inthiscase,itdoesn'treallymatterinwhichcat­egorythecostsareaccumulated,aslongasthereisconsistency.Thedetaileddescriptions(AppendixB)willattempttoidentifyelementsthatmightbeviewedthisway.

Thesecondwayinwhichpreventioncostscouldbemisunderstoodoccurswheneveranindividualisengagedinpreventionactivitiesasanintegralbutsmallpartofaregularjobassignment.Inmanycases,thismaybeahighlysignificantactivity,suchascontrolchartingbythepro­ductionoperator,andpartoftheoperator'scostcouldbeconsideredpre­ventioninthequalitycostreport.However,someconsiderthistypeofpreventionactivityasadesirable,built-in,self-disciplinecostthatispartofnormaloperatingexpense.Thismayalsoincludeallocationsforauto­matedmechanisms,suchasaself-checkingmachinetool,automaticprocesscontrolequipment,oraninspectioneditbuiltintothesoftwareforserviceprocessingbycomputer.Ontheotherhand,individuals,suchasengineersoranalysts,mayworkfull-timeforshortperiodsinactivities(suchasqualityimprovementprojects)specificallytopreventdefectsorsolveotherqualityproblemsfurtheralongintheprocess.Thistypeofactivityisclearlyintendedtobeapartofpreventioncosts.

Appraisalcosts-thecostsassociatedwithmeasuring,evaluating,orauditingproductsorservicestoassureconformancetoqualitystandardsandperformancerequirements.Theseincludethecostsbfincomingandsourceinspection/testofpurchasedmaterial;validation,verification,andcheckingactivities;in-processandfinalinspection/test;product,proc~ess,orserviceaudits;calibrationofmeasuringandtestequipment;aijdthecostsofassociatedsuppliesandmaterials.

Failure-cbsts-thecostsresultingfromproductsorservicesnotconformingforequirementsorcustomer/userneeds-thatis,thecostsresultingfrompoorquality.Failurecostsaredividedintointernalandexternalfailu{ecostcategories:

•Internalfailurecostsoccurpriortodeliveryorshipmentoftheproduct,orthefurnishingofaservice,tothecustomer.Examples

includecostsofscrap,rework,reinspection,retesting,material

review,anddowngrading.

•Externalfailurecostsoccurafterdeliveryorshipmentoftheproduct,orduringorafterfurnishingofaservice,tothecustomer.Examplesincludethecostsofprocessingcustomercomplaintsincludingnecessaryfieldservice,customerreturns,warrantyclaims,andproductrecalls.

33 QualityCostSystemDefinitions

QUALITYCOSTELEMENTSQualitycostelementsarethedetailedfunctions,tasks,orexpenseswhich,whenproperlycombined,makeupthequalitycostcategories.Forexam­ple,qualityplanningisanelementofprevention,.in-proces~inspectionisanelementofappraisal,reworkisanelementofmternalfmlure,andcus­tomerreturnsareanelementofexternalfailurecosts.

Althoughitisrecommendedthatqualitycostcategoriesbeusedasdefinedherein,theelementsmakingupthesecategoriesaredifferentfromindustrytoindustry.Qualitycostelementsinhealthcare,forexample,dif­fersianificantlyfromthoseinmanufacturing.Becauseoftheextentofthesebdifferencesandthemanyindustriesinvolved,suchasbanking,insurance,hospitality,etc.,noattemptwillbemadetoprovidecompletelistsoftheseelementsbyindustry.However,everyattemptwillbemadetoincludeexamplesfromtheseindustrieswhereverpossibletohelpread­ersdeveloptheirownlists.Usingthecategorydefinitionsandexamplesasguidelines,theelementscanbetailoredtoyourorganization.

Indevelopingdetailedelementsforyourorganization,theapproachtakenistodescribetheactivitiesorworkbeingperformedwhichcanbeconsideredqualitycosts-thatis,workthatwouldnothavetobeper­formedifqualitywere,andalwayswouldbe,perfect.Then,usingthecat­egorydefinitionsasaguide,fitthesetasksintothepropercategories.Forexample,ifthetaskisbeingaccomplishedtopreventpoorquality,thecostofthetaskisapreventioncost.

Fortheconvenienceofdevelopersofindividualqualitycostsystems,detaileddescriptionsofqualitycostelementsforeachcategoryofqualitycostsareprovidedinAppendixBandmaybeusedasaguide.Forfurtherhelp,manyexcellentarticlesandpublicationsonqualitycosts,inv~riousser­viceindustriesaswellasmanufacturingindustries,arereferenced111Appen­dixC,"BibliographyofPublicationsandPapersRelatingtoQualityCosts."

ChapterTwo 32

Inworkingoutthedetailsofanindividualqualitycostsystem,itisimpor­tantforthequalitymanagerandthecontrollertoworktogether-tomeshtheirtwodifferentsourcesofknowledgeintooneintegratedsystem.Sincethecostsinvolvedmaybeincurredbyanydepartment,function,orcostcen­ter,acustomizedintemalqualitycostprocedureisrequired.Thisprocedurewilldescribethesourcesofdatatobereportedfromtheaccountledgersintermsofexistingaccount,department,andcostcentercodes.Itwilldescribehowanyrequiredestimatesaretobepreparedandwheretouseassociatedlaborbenefits,allocatedcosts,andlaborburdens,anditwillprovidethemeasurementbasesagainstwhichqualitycostsmaybecompared.

Whileactualdollarsexpendedisusuallythebestindicatorfordetermin­ingwherequalityimprovementprojectswillhavethegreatestimpactonprofitsandwherecorrectiveactionshouldbetaken,unlesstheamountofworkperformedisrelativelyconstant,itwillnotprovideaclearindicationofqualitycostimprovementtrends.Remember,theprimevalueofaqualitycostsystemisinidentifyingopportunitiesforimprovementandthenprovid­ingameasurementofthatimprovementovertime.Sincethevolumeofbusi­nessintotal,orinanyparticularproductorserviceline,willvarywithtime,realdifferences(improvements)inthecostofqualitycanbestbemeasuredasapercentof,orinrelationto,someappropriatebase.Totalqualitycostcomparedtoanapplicablebaseresultsinanindexwhichmaybeplottedandperiodicallyanalyzedinrelationtopastindices.Thebaseusedshouldberep­resentativeof,andsensitiveto,fluctuationsinbusinessactivity.

Forlong-rangeanalyses,netsalesisthebasemostoftenusedforpre­sentationstotopmanagement.Forexample,totalcostofqualitymaybescheduledforimprovementfrom9percentofsalesto8percentduringagivenbusinessplanyear.Whilethismeasurementmaybeimportantfromastrategicplanningpointofview,itwouldnotbepracticalandcouldbemisleadingfortheday-to-day,week-to-week,month-to-monthneedsofthepractitionerswhoarecommissionedtomakeithappen.

Inindustriessuchasaircraftmanufacturing,thefailuretoshipjustoneaircraftinthequalitycostreportperiodcouldseverelyimpactsalesforthatperiod.Salesfortheperiodwoulddropsignificantly,therebycaus­ingariseinthequalitycostindex,although,infact,qualityperformancemaynothavechangedatall.Goingonestepfurther,thesaleofthatair­craftinthefollowingperiodmightinflatethatperiod'ssalesfigures,therebycausingamisleadingbutsignificantqualityimprovementtrendwhencomparedtothepreviousperiod.

Ingeneral,inindustriesinwhichsalesmayvarysignificantlyfromonequalitycostreportingperiodtoanother,netsalesdonotmake~g.oodshort-termcomparisonbase.However,theseshort-termsalesvanatIOnsshouldevenoutoverthelongterm,andtheuseofnetsalesforalong-

rangecomparisonbaseisexcellent..Short-rangebasesshouldbedirectlyrelatedtoqualItycostsas.they

arebeingincurredandreported.Theyshouldrelatethecost.ofqualitytotheamountofworkperformed.Forshort-rangeuse,appropnate~asesf~rqualitycostsarebestdeterminedfromareviewofdataalreadyI~usemworkareasand,thereby,alreadyunderstoodbythepeoplewhowI!lhavetolearntousequalitycosts.Infact,thebestbasesaret~oseWhIcharealreadykeymeasuresofproduction.Typicalexamplesmcludeoveralloperatingcosts,totalordi.rectlaborcosts,valu.e-addedco~ts,.a~d.theactualaveragecostofadeliveredproductorserVIce.ThebaSICIdeaIStouseameaningful,on-line,andwell-knownbaserelatingtotheamountofbusinessactivityineachareawherequalitycostmeasurementsaretobe

appliedinsupportofperformanceimproveme.nt...Foreffectiveuseofaqualitycostsystem,Itmaybepreferabletohave

morethanonebase.Usually,forlong-rangeplanningpurposes,totalqual­itycostsasapercentofnetsalesisused.Theremaybenobettercommon,denominatorthannetsalesforyear-to-yearplanningandmeasures.ofaccomplishmentaccordingtotopmanagement.Forcurrent,ongolllgapplications,however,severalbasescanbeused.The~asesselectedshouldberelatedtothemanagementemphasisalreadybelllgplaced.onspecificareas'forimprovement.ThefollowingexamplesaretypIcal

indicesthatincorporatethisfeature:

•Intemalfailurecostsasapercentoftotalproduction/servicecosts

•Externalfailurecostsasanaveragepercentofnetsales

•Procurementappraisalcostsasapercentoftotalpurchased

materialcosts

•Operationsappraisalcostsasapercentoftotalproduction/service

costs

•Totalqualitycostsasapercentofproduction/servicecosts

Thereisnolimittothenumberofindicesorthelev~1o~detailt~ata.neffectivequalitycostsystemcanhave.MoredangereXIstS1Il.oversImplI­fication-suchasusingonlyonebaseforallpurposes:ThereIS?Operfectbase.Eachbasecanbemisleadingifusedalone.ThIScaneaSIlyleadto

34ChapterTwo

QUALITYCOSTBASES

QualityCostSystenlDefinitions35

OtherConsiderationsPertainingtoBasesThepreviousdiscussionfocusedontheappropriatenessofavailablefinancialbasestoqualitycostsviewedintermsofratios,indices,orper­centages.Thereareadditionalfactorswhichcaninfluenceapplicationofthesebases:

•Sensitivitytoincreasesanddecreasesinproduction/serviceschedules.Mostmanufacturingandserviceoperationshavealevelatwhichefficiencyishighest.Additionsandsubtractionsfromtheworkforce,maintenanceofequipment,andtheuseofbackupsuppliersmayinfluencebothqualitycostsandbuilt-inprimec~sts.Iftheinfluenceissubstantial,anattemptshouldbemadeto.quantifythesefactorsandrecommendchancrestomini- .b

mlzeadyerseeffects.Inthesedaysofseriouscompetition,suc-cessfulcompaniesareusingmanytechniquestoovercomesuch~dver~einfluences,includingflexiblemanufacturingsystems,lIlten~lveformaltraining,andJust-In-TimequalityprogramswithsupplIers.

37 QualityCostSystemDefinitions

•Automation.Withproductivityandqualityasnationalgoalsintheworld-classcompetitionforbusiness,successfulcompanieshaveturnedtoroboticsandautomationtoreducedirectandindirectcosts.Hereagain,theeffectsonratiossuchasscrap,rework,orappraisalversusdirectlaborcostsmaybesubstantial.Obviously,applicationofqualitycostprinciplesdictatesthatwebeabletomeasurethe(presumed)favorableinfluenceofautomationonappraisalorfailurecostsand,morebroadly,ontheabilityofabusinesstoinfluencecus­tomerperceptionsandactualexperienceconcerningquality.

•Seasonalproductsales.Somecompanies,suchasdepartmentstores,havehighseasonalsales.Externalfailurecosts,suchascus­tomercomplaints,rriaybeseasonallygroupedandqualitycostsadjustedaccordingly.Afour-quartermovingaverageoftheratiobetweenexternalfailurecostsandnetsalesbilledisanappropriatetechniquetouseinthesecircumstances.

•Oversensitivitytomaterialpricefluctuations.Thelawofsupplyanddemandstillprevails,andrawmaterialcostsmayexperiencewidefluctuations.Ifinternalfailureorappraisalareratiosresultingfromtheapplicationofprimecosts,thismayhaveadramaticeffect.Insuchcases,theuseofdirectlabor,ratherthanprimecosts,maybeappropriate.

TRENDANALYSISANDTHEIMPROVEMENTPROCESS ,Qualitycostsalonecannotdoanythingforacompanyexcepttoillustratewhatisbeingexpendedinspecificareasrelatedtoqualityandtohighlightopportunitiesforcostimprovement.Toputqualitycoststouse,theymustbeorganizedinamannerthatwillsupportanalysis.Aspreviouslynoted,onewaytoachievethisistolookatqualitycostsinratiowithknowncosts.Usethemtoraisequestionssuchas

•Didyouknowthatforevery$100spentforproduction,$14arelostininternalfailurecosts?

•Didyouknowthatforevery$100spentformaterialpurchases,$3havetobespentforsuppliergoodsinspection?

Questionssuchastheseimmediatelyshowthevalueofqualitycostsindirectrelationtoknowncostexpenditures.Thenextlogicalstepisto

Chapternvo 36

confusionanddisinterest.It'simportanttothesuccessofqualitycostusethatbasesforindividualprogressmeasurementsnotappeartobeunnat­uraltotheparochialintentofthearea.Instead,theyshouldbeseenascomplementarytothatintent(forexample,reworkcostsasapercentofarealaborcosts).Theycouldalsobeusedtoprovideindicesthatmayhaveshockvalue-togetthecorrectiveactionjuicesflowing(forexample,"Hey,didyouknowthat,foreverydollarexpendedinyourarea,fiftycentsresultsfrompoorquality?").

Tohelpintheselectionprocess,considerthefollowingtypesor-nor­mallyavailablebases:

•Alaborbase-suchastotallabor,directlabor,orappliedlabor

•Acostbase-suchasshopcost,operatingcost,ortotalmaterialandlabor

•Asalesbase-suchasnetsalesbilledorsalesvalueoffinishedgoodsorservices

•Aunitbase-suchasthenumberofunitsproduced,thenumberofservicesperformed,orthevolumeofoutput

39

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38ChapterTwo

assembleandexaminetheseratiosovertimetodeterminewhetherthesituationbeingdepictedisgettingbetterorworse.Failurecosts,inpar­ticular,lendthemselvestothistypeofanalysis.Supplementingtheinitialanalysiswiththebestempiricalexplanationsofwhatcanbeachievedwillbecomethefirststepintheprojectionofreasonableimprovementgoals.Eachindividualtrendanalysiscanthenbeextendedintothefuture,firstasaplanwithspecificgoalsandthentomonitoractualprogressagainsttheplan.

Asindicatedinthediscussionofqualitycostbases,therearetwotypesofqualitycosttrendanalyses:long-rangeandshort-range.Thelong­rangeanalysisnormallyviewstotalqualitycostsoveralongperiodoftime.Itisusedprincipallyforstrategicplanningandmanagementmoni­toringofoverallprogress.Short-rangetrendchartsarepreparedforeachcompanyareawhereindividualqualitycostimprovementgoalsaretobeestablished.Theapproachtoshort-rangetargetscanbetoassignoneforeachgeneraloperationalarea,oritcanbecomeasdetailedandsophisti­catedasthequalitymanagementsystemwillsupport.

Figure2.1isacompositeexampleofalong-rangequalitycosttrendchartforatypicalorganizationwithsalesintherangeof$100millionto$200million.Itshowstotalcostofqualityasapercentofnetsalesoveraperiodoftenyears.Italsoshowsprevention,appraisal,internal,andtotalfailurecostsseparatelyasapercentofsales(externalfailurecostsareshownasthedifference-theshadedportion-betweeninternalandtotalfailurecosts).Thefirsttwoyearsshowqualitycosthistorywithoutanyknowledgeof,oremphasison,itsreduction.Thethirdyearisthestartofqualitycostmeasurementanduse.Yearsfourthroughnineshowactualprogressaccomplished.Year10isaprojectionoftheexpectedcontinuedprogress.

Todetermineexactlywheretoestablishshort-rangequalitycosttrend.chartsandgoals,itisnecessarytoreviewthecompany'sbasicqualitymeasurementsystem.Toactuallyreducequalitycosts,itisnecessarytofindtherootcausesofthesecostsandeliminatethem.Realimprovementdependsonactionswithinthebasicqualitymeasurementandcorrectiveactionsystem,enhancedbytheuseofqualitycostsasanimportantsup­porttool.Specificusesofqualitycosts,therefore,mustbecorrelatedtospecificqualitymeasurementtargetareasforimprovement.

Aminimumqualitymeasurementsystemshouldincludesummaryappraisalresultsfromallkeyoperationalareas.Theseincludereceiving

'-'!LUI/!t::,1~VU

inspection,fabricationinspection,finalassemblyinspectionandtest,andfieldfailurereports.Thesummariesareusuallypresentedastrendchartstoindicateandmakepeopleawareofthecurrentlevelsofqualityperfor­mance.Qualitycosttrendcharts,whencorrelated,willsupplementtheseperformancechartswithviablecostdatatosupporttheimprovementeffort.Thisistheessenceoftheirusetogether(seeFigure2.2).

Itshouldbenotedthatthereisnormallyatimelagbetweenbasicqualitymeasurementdataandqualitycostdata.Qualitymeasurementdataarealwayscurrent(usuallydaily),whereasqualitycostdataareaccumu­latedafter-the-fact,asmostcostaccountingreportsare.Itisimportant,therefore,tounderstandthatqualitycostsareusedtosupportimprove­ment(before-the-fact)andtoverifyitsaccomplishment(after-the-fact),butactualimprovementoriginatesasaresultofusingcurrentqualitymea­surementdatainthepursuitofcauseandcorrectiveaction.

Thereisalsoatimelagbetweencauseandeffect-thatis,qualityimprovementsdonotshowimmediatereductionsinqualitycostbecauseofthetimelagbetweenthecauseanditseffect.IThislagcanbeobservedonaqualitycosttrendchart.Forthispurpose,itmaybedesirabletoindi­cateonthechartwhenqualityimprovementsweremade.

Figure2.3isasimplifiedqualitycosttrendchartmarkedtoindicatethestartofaqualityimprovementactivity.Thenoteenablesustoseethereasonforthesteadyimprovementoverthepastfivemonths-inApril,trainingprogramswereinitiated.

Thefirsteffectwasanincreaseinthequalitycostindexduetothecostoftheprograms(preventioncostincreasedbutfailurecostsremainedthesame).Afteracause-and-effectlagofabouttwomonths,thevalueofthetrainingbegantobecomeevident,asshownbyasteadyreductioninthequalitycostindex(failurecostsdecreasedwhilepreventioncostsremaiI)edthesame).ByNovember,a45percentreductionwasindicated.

O~viously,the~rainingprogramswereaw0l1hwhileinvestment.Hadnoimprovementbeenindicatedafterareasonableamountoftime,someaction~ouldhavebeennecessary.Theprogramswouldhavehadtobereevaluatedandeitherrevisedordroppedinfavorofsomeothercourseofaction."-.

Actualqualityimprovementbeginswiththepreparationofacumu­lativefrequencydistributionofdefecttypesforeachqualityperfor­mancetrendchartused.Acumulativefrequencydistributioncanbeshownasasimplebarchartusingthetotalsforeachdefecttypeforthe

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Likemanygoodthingsinlife,aqualitycostprogramwillnotoccurbyitself.Itsimplementationrequiresanadvocateandchampionwithinthecompany.Whilethispersonnormallyisthequalitymanager(orseniorqualityfunctionrepresentative),itcanbeanyone.Theonlyrequirementsareknowledgeofqualitycostsystems,aclearviewandbeliefintheirapplicationandvaluetothecompany,adesireandwillingnesstobeadvo­cateandleader,andthepositionandopportunity(withinacompany)tomeettheimposedchallenges.

Thefirststeptobetakenistoverifywithfactualcoststhataqualitycostprogramcanbebeneficialtothecompany.Thisisnecessarytoattractmanagement'sattentionandinterest.Todothis,areviewandanalysisoffinancialdatamustbeconductedinsufficientdetailtodeterminethegen­erallevelsofqualitycostsastheyexisttoday.It'sthemajorcosts,however,thatareimportantforthispurpose.Mostlikely,muchofthedatarequiredispresentlyandreadilyavailable.Ifnot,someofthesecostsmayevenbeestimated.Thepointisthatthisstepshouldberelativelyeasyanddoesnothavetoaccountforallqualitycosts.Ifreadilyavailableandeasilyesti­matedcostsareincludedandrepresentthemajorcostsofquality,thensuf­ficientdatawillhavebeenobtainedtopresenttomanagement.Thesedatashouldjustifytheeffortandinterestmanagementinparticipatingintheprogram.Becareful,however,tolocateanymajorincrementsofqualitycostthatmaybehiddeninlargeaccounts,(e.g.,significantreworkcostsburiedinnormaloperatingcostaccounts.

Chapter3

QualityCostProgramImplementation

HOWTOGETSTARTED

45

•Establishannualimprovementgoalsfortotalqualitycosts.

•Developshort-rangetrendanalyseswithindividualtargetswhichcollectivelyadduptotheincrementaldemandsoftheannualimprovementgoal.

Monitorprogressagainsteachshort-rangetargetandtakeappropriatecorrectiveactionwhentargetsarenotbeingachieved.

44ChapterTwo

i.iis~!e?ll!."'.'....._-_...._-"",......~......~~_................._....._.........._...........~.....,......,.===,J.~""""".....,.-,..--~_

Oncethequalitycostlevelsaredetermined,theopportunityforim­provementshouldbeobvious.Theresultsshouldbesufficienttosellman­agementontheneedfortheprogram.Itisnotuncommontofindinitialqualitycostestimatesofmorethan20percentofsales.Whiledirectcom­parisonscannotbemade,somemanufacturingcompanieswithextensivequalityimprovementprogramandqualitycostexperiencearedemonstrat­ingthattotalqualitycostscanbereducedtoaslittleas2percentto4per­centofsales.Thereductionispretaxprofit.

Thenextstepistodeterminewhethermanagementisreadytoacceptaridsupportaqualitycostprogram.Hereaninternaljudgmentisrequired.Therealquestioniswhethermanagementistrulyopentonewideasintheoperationsareaofthecompany.Unfortunately,aqualitycostprogramcanneversucceedfromthebottomorthemiddleoftheorganizationupward.Itneedsthebackingandsupportoftopmanagementtohaveanychanceforsuccess.

Whenithasbeendeterminedthattopmanagementwillbereceptive,thenextstepistoplanthesalespitchneededtoachieveitsacceptanceandsupport.Forthispurpose,inadditiontothegenerallevelsofoverallqual­itycostsalreadydetermined,amoredetailedexamplewillberequired.Thatis,aspecific,incrementalareaoftheoperationmustbeexposedtomanagementinsufficientdetailtoshowhowactualqualitycostscanbecalculatedandeliminatedthroughanalysisandcorrectiveaction.Thus,management'sunderstandingofthefullcycleofqualitycostopportunityandaccomplishmentwillbecomplete.Alogicalapproachtofindingtherightexamplefortopmanagementistoconductasurveylookingforspe­cificareaswithhighfailurecosts.Thentheareaswiththemostobviousopportunityforimprovementareselected.Finalselectionoftheareatobeusedastheexample,andprobablyforthepilotrunoftheensuingprogram,shouldbeinfluencedbythecooperativeattitudeoftheareamanagementteam.ThebestexampleshouldprovidenotonlytherightopportunitybutalsoahighprobabilityofinstantSuccesswhentheprogrambegins.

Atthispoint,thechampionofqualitycostsisreadytodevelopanoverallplanandscheduleforqualitycostprogramimplementation.Essentialingredientsoftheplanshouldinclude

•Themanagementpresentation,designedtoidentifytheoverallopportunity,toshowanexampleofhowtheprogramwillachieveitsbenefits,andtoaccomplishmanagementacceptanceandsupportfortheimplementationplanandschedule

THEMANAGEMENTPRESENTATIONBeforeundertakinganylarge-scaleattempttoimplementaqualitycostpro­gram,managementmustbeconvincedofthevalueoftheprograma~~theuseforwhichthesystemisintended.Anyproposedneed~or.addItIOnaleffortsintheimportantbusinessofcostaccumulationsanduseIS.lIke!ytobechallenged.Thus,acomprehensivepresentationtomanagementIS.neededtoelicititsunderstandingandinterest,andtojustifytheproposedeffort.

Companiesnotalreadyengagedinqualitycostpr~gramsar~unawareoftheactualmagnitudeofthequalitycostdollarandItSdIrectlfnpactontheirtotalbusiness.Thisiswherethepreviousevaluationofthegenerallevelsofqualitycostcomesintoplay.Those?guressh~wnotonlythepre­viouslyunknownlevelsofqualitycost,partIcularlyfaIlurecosts,.thata~e

beingincurred,butalsothepotentialcostimprovementopp~rtuDlty.ThISshouldwhetmanagement'sappetitetohearmoreandallayfearsthattheproposedbenefitsmaynotbereal...

Likeanysellingproposition,apositiveatt~tudemustpermeatethISpre­sentation.Benefitstomanagementmustcontll1uallybestressed.Notonlywillcurrentexpenses,unproductivework,andpurewastebereduce~,butcustomerrelations,marketshare,employeesatisfaction,andprofitwIllbeenhanced.Thereisnotatopmanagementteaminexistencethatdoesnotwanttoimprovequality,buttherearemanythatdon't~nowexactlyhowtoproceedorarenotsureiftheircompaniescana~or~It.T~emess~geofcostofqualitycouldbeexactlywhatisneededtoJustIfytheIrpurSUItofa

soundqualityimprovementprogram....Thepresentationshouldcontainacleardes.cnptlOnofthedetaI~ed

intentoftheprogramandhowitwillbeaccomplIshed.Itshould.descnbetheextracostdatatobegathered(theinvestme~t).ThequalItycostsarrivedatearlierandthedetailedexamplepreVIOuslychosenshould

46ChapterThreeQualityCostProgranzImplementation

•Conductoftheplannedpilotprogram

•Educationofallfunctionstodevelopawarenessandinterestinparticipationinthequalitycostprogram

•Developmentoftheinternalqualitycostaccountingprocedure

•Overallcollectionandanalysisofqualitycostdata

•Qualitycostreportinganduse(integrationwiththequalitymanagementsystemandqualityimprovementprogram)

47

results.Dependingonactualcircumstances,itmaybeadvisabletoworkwithaunitassmallasasingleprogramorproductlinewithinafacility,atypicalplantorofficeinamultifacilitycompany,oranentirecompanydivision.Therearenohardandfastrules,butthefollowingguidelinesshouldapply.Toassureahighprobabilityofsuccess,theunitselectedforthepilotprogramshould

•Beastypicalofthecompany'soperationaspossible

.·Containcostsinallcategoriesofqualitycostmeasurement,althoughsomeelementsmayhavetobeestimated

•Presentobviousimprovementopportunities

•Haveacooperativelocalmanagement

Beforestartingthedetailedplanningforthepilotarea,akeypersonfromtheaccountingdepartmentshouldbeselectedtoworkwiththeleader/advocate(ifaco-leaderfromaccountingwasnotpreviouslyassigned).Thispersonwillhelpbridgethegapbetweencurrentaccount­inginformationandtheneedsofthepilotqualitycostprogram-iandwilllaterdevelopthecompanywidequalitycostaccountingprocedure.Itisadvisabletoselectsomeonewhoisaprogressivethinkeranda'quality­mindedperson.Selectanindividualwhoknowsnotonlyhowthebooksshouldbekeptbut,moreimportant,exactlyhowtheyarekept.

Thentheleader/advocate,theaccountingrepresentative,andalocalareamanagementrepresentativecanformateamtopursuethepilotqual­itycostprogramobjectives.Alltheexpertiseneededtoassuresuccessexistsinthisteam.Fromthispointon,it'samatterofeffort,patience,andperseverance.

Theactualstepsofthepilotprograminvolve

•Measurementofqualitycostsandappropriatebases

•Tie-inwithbasicqualitymeasurements

•Establishmentofkeytrendanalysischarts

•Identificationofimprovementopportunitiesandgoals

•Leadershipandsupportofproblemidentification,analysis,andsolution

•Strictenforcementofnecessarycorrectiveactions

•Summaryreportingofprogress

ChapterIhree

clearlyillustratethatfailurecostsbeingincurredcouldbealmosttotallyprevented(thereturnoninvestment).Thepicturepresentedshouldbeoneofgoldnuggetsjustsittingthere,waitingtobepluckedfromtheopera­tion.Theclarityandauthenticityofthisportionofthepresentationwillgoalongwaytowardalleviatingwhateverfearsmanagementmayhaveabouttheprogram'svalidity.

Oncemanagementissoldonthegenuinevalueoftheprogram,itcanthenbeeducatedinthebasicconceptsofqualitycosts(chapter1)andtheneedforteamworkamongallinvolvedfunctions.Emphasisshouldbeplacedonthefactthatquality-relatedcostsarenotsolelygeneratedbythequalityfunction.Theyencompasssignificantcostsgeneratedbydesign,purchasing,operations,andvarioussupportgroups.Itis,indeed,acom­panywideprogram.

Finally,thepresentationshoulddescribethequalitycostprogramimplementationplanandschedule,theresultsthatcanreasonablybeexpected,andaclearindicationthattherewillbeanextraordinaryreturnoninvestment.Beforethemeetingisconcluded,managementshouldgiveitsapproval,support,andcommitmenttoparticipate.

THEPILOTPROGRAMApilotprogramisrecommended,becauseitwill

•Provetheabilityofthesystemtoproducecost-savingresults

•Resellmanagementonthecontinuedneedfortheprogram

•LimittheinitialScopeofimplementation-bothpeopleandarea

•Allowsystemdebuggingpriortofullimplementation

BecauseofitsimportancetotheultimateSuccessofqualitycostimplementation,thepilotprogramneedsafull-timeleader-onewhoknowsqualitymanagementandthecompanyandwhoiswillingtolearnaboutaccounting(aco-readerfromaccountingwouldbeidealbutisnotmandatory).Theprincipa!investmentsintheentirequalitycostprogramaretheleader/advocateandthequalitycostcollectionsystem.Thisisarelativelysmallinvestmentinaprogramthatcanhavefar-reachinabene­fits.Itis,however,apointthatshouldhavebeenraisedandcommittedtoatthemanagementprese~tation.

.Selectionofthepilotarea,asdiscussedpreviously,shouldbestronglymfluencedbythearea's.opportunitytoproducequickandsignificant

QualityCostProgramImplementation49

QUALITYCOSTEDUCATION

Asthepilotprogramprogresses,itshouldbedocumentedasacasehis­toryforusewithqualitycostprogramimplementationonacompanywidebasis.Iftimingcouldbesuchthatpilotprogramprogresscouldbeachievedbeforetheendofafiscalyear,thestagewouldbesettoallowforcompa­nywideimplementationtostartatthebeginningofanewfiscalyear.

Aftermanagementapprovalofthequalitycostprogramandconcurrentwiththestartofthepilotprogram,keymembersofeachdepartmentshouldbeeducatedintheconceptsofaqualitycostsystemandthedetailedprogramplanforimplementation.Emphasisshouldbeplacedontheinvolvementofallfunctions,theimportanceofteamwork,andtherealopportunitiesforperformanceandcostimprovementthatexistinmanyfunctionalareas.Theimportanceofexamplesherecannotbeoverstressed.Theultimateobjectiveofthiseducationisagreementonthebenefitsoftheprogramandacom­mitmenttocooperationorparticipationasrequired.

DepartmentsshouldbegiventheopportunitytoreviewtheentireprogramasplannedandSeeexactlywheretheyfit.Astheycometorec­ognizethecontributionsorparticipationthatwillbeexpectedofthem,theycanbegintoevaluatetheprogram'sbenefitsandimpactontheirindividualdepartments.Itisveryimportantatthispointinprogramdevelopmentthatalldepartmentrepresentativesbeencouragedtomakeprogramsuggestionsfromtheirexpertviewpoints-thatis,solicitqual­itycostelementspeculiartoeachdepartment.Askthemtopreparealistofthosetasksorfunctionsperformedbytheirdepartmentsthatcanbeconsideredqualitycosts-workthatwouldnothavetobeperformedifqualitywereandalwayswouldbeperfect.Then,usingthedefinitionsprovidedinchapter2asaguide,fitthesetasksintothepropercate­gories-prevention,appraisal,andinternalorexternalfailure.Forexam­ple,ifafunctionwasperformedbecauseaproductorservicedidnotcon­formtorequirementsorcustomer/userneeds,itscostisconsideredafailurecost.Further,Ifthenonconformancewasdiscoveredpriortodeliveryorshipmentoftheproduct,orthefurnishingofaservicetothecustomer,thefailurecostisaninternalfailurecost.(See"QualityCostsElements,"page33;Figure3.1;andAppendixBforhelpinthisprocess.)Thetasksorfunctionslistedandcategorizedaretheirdepartments'qual­itycostelements.Adoptionoftheseelementsintotheprogram,alongwithanyotherworthwhilesuggestions,willnotonlyhelptorefinethe

51 QualityCostProgramImplementation

Ass'lbanmentofcostelementstoqualitycostcategories. Figure3.1.

detailsoftheprogrambutalsowillalloweachdepartmenttobecomea

partoftheproaram'sdevelopment..dfTheualit~costeducationofkeyrepresentativesofI~volveunc-

tionalorg~nizationsalsoprovidesanbopp~r:~~~tYyt:~~~e::i~;;:~~~~:~~~allqualitymanaO'ement,theeneISeo.

too:erdfthOepitfallsthathindersuccess.ThefollowingItemsqualityansome0f.should'alwaysbeincludedinthequalityeducationofotherunctions.

Isthiscostrelatedtothe---~Preventionpreventionofpoorquality---------...-Yes

'"pmd"'rm""ice,'

T Isthiscostrelatedto...-Appraisalevaluatingtheconformance--------_Yesofproductsorservicestoqualitystandardsandp,"mm'!',;,q",,,m,,.?

No

l Isthiscostrelatedto~Yes------~Internalnonconformingproducts---~Yes---...-Foundfailure

.7beforeorservices.shipmentof

\

productorprovtngservice

"fNf

FoundExternalNotaqualitycostafter--------Yes------failure

shipmentorprovidingservice

ChapterThree 50

INTERNALQUALITYCOSTPROCEDUREConcurrentwiththeprogressofthepilotprogram,thecompanyqualitycostprocedurecanbedeveloped.Itwillalreadyhavebeendiscoveredthatmanyo~theneededqualitycostdataarenotreadilyavailablefromthecostaccou.ntlllgs~stem.In.atypicalservicebusiness,forexample,many~ppraIsalandmternalfaIlurecosts.areconsideredanormalpartofopera­tIons.AssU~h,thesecostsarenotsegregatedandavailableforuse.Inothercases,wha~ISaccountedforintheaccountingbooksmaynotbethesameasthequalItycostdefinition.Reworkinmanufacturing,forexample,maybeaccountedforasavar~anceaga~nstastandardallowance.Discrepancies~uchasthese,coupledWIthexpectedvariationsinindividualcostaccount­mgsystems,clearlysignal.theneedforadetailed,internalqualitycostpro­ceduref~reachcompanyInvolvedinaqualitycostprogram.

Thel/lte~nalqualitycostproce<;lureisnecessarytodescribeeachele­mentofqualItycosttobeusedandtodefinehowandwhentheactualcostdataaretobeestimatedorcollected,andassembled.Italsodefinesthe

53 QualityCostProgramImplementation

comparisonbasestobeincluded.Toassureaccuracy,intermsofactualcosttothecompany,theprocedureshouldalsodefinetheapplicationoffringebenefitcosts,overheadburdens,andotheraccountingadjustmentstoeachdefinedelementofqualitycost.Finally,theprocedureshouldestablishresponsibilitiesforexecutionofitsrequirements,anditshouldprovideareportingformatforthequalitycostdatatobepresentedforuse(seeFigure3.3,page57,foranexampleofasummaryreport).

Toassuretheintegrityofthequalitycostdataandtheiracceptancebyallwhomaybeaffectedbythedata,theinternalprocedureshouldbeauthorizedbythecontrollerorchiefaccountant.Theprocedurecanbepreparedwiththehelpofthequalitycostleader/advocate,butitshouldbeimplementedthroughaccounting.Ifthecollectionofqualitycostdataisrelatedtothequalityfunction,itwillnothavethevalidityrequiredtocommandattention.Infact,itmighteasilyslipintothatrealmofaccom­modationsviewedas"belongingtothequalitydepartment."

Agoodplacetostartinpreparingthisprocedureisthecompany'smanualofaccounts,whichshouldprovideadescriptionofwhateachaccountcontains.Addtothisthe"DetailedDescriptionofQualityCostElements"includedinAppendixBandtheelementlistsarrivedatbytheindividualdepartmentsduringthequalitycosteducationphasediscussedearlierinthischapter.Thenbeginthejudgmentsthatwillmatchaccountswithqualitycosts.Anobviousmatchwilloccuriftheaccountexistsonlybecauseofless-than-perfectwork,suchasareworkaccount.Moreoftenthannot,thematchwillnotbesoobvious,andpracticaljudgmentswillhavetobeworkedout.Internaldefinitionsshouldusetermsthatmakesensetotheusers.Simplificationandclarity,ratherthanmagnitude,istheruleofthumbthatshouldbeapplied.Don'tmakea"program"outofthecollectionsystem.

Inpreparingtheinternalprocedure,thereisnoneedtoagonizeoverthepropercategoryforanyquestionableincrementofqualitycost.Rememberthattheultimateaimistoreduceallelementsofqualitycostconsistentwiththegoalsofthecompany'squalityimprovementprogram.Withthisinmind,incrementsofqualitycostmeasurementscanbeallo­catedtothosecategoriesthatbestfittheneedsofthecompany.Thisispar­ticularlyapplicablewhenaperson'snormalactivitiesfallintomorethanonequalitycostcategory,suchasatesterwho,inadditiontoacceptancetesting,workspart-timetroubleshootingandpart-timeretestingbecauseoffailures.Inthiscase,acompanymustdecidewhethertoincludethe

ChapterThree

oRememberthat,withoutaqualitymanagementsystemandqualityimprovementprogramtosupport,thereisnoneedforqualitycosts.Emphasizethetwofoldbenefitsofqualityimprovement-improvedcustomersatisfactionatlesscost.

oRememberthattherecanbenoimprovement,costorotherwise,withoutcorrectiveaction.Eachdepartmentmustbecommittedtoallrequiredcorrectiveaction.

oRememberthattheobjectiveofthequalitycostprogramistoiden­tifyareaswherecostimprovementscanbeachievedthrouohthebettermentofqualityperformance.Don'tinsistthateverydefinableelementofqualitycostbetracked.Ifit'snottrulysignificant,don'targueaboutit.Throwitout.

oDo.n'tc?n:plicatethebookkeepingbecauseofqualitycosts.RelatetoItasItIS.Changeitonlyiftheknowledgegainedprovesthatitshouldbechanged(fromabusinessviewpoint).

•Don'ttrytomovetooquicklyfromthepilotprogramintoallotherareas-evenwhenthepilotprogramisexpectedtobeverysuc­cess!uI..Rememberthatqualitycostprogressisajourney,notadestlllatlOn.

52

QualityCostCollection

Ideally,theinternalqualitycostprocedureincludesacompletesystemofcostelements,generatedasdiscussedintheprevioustwosectionsofthis

QUALITYCOSTCOLLEGiaNANDANALYSISPreparingandofficiallyissuingtheinternalqualitycostprocedureisacompany'skeycommitmenttotheimplementationanduseofaquality~ostsystem.Thisisoneofthebestthingsthatcouldhappenforthequal­Itymanagementprogram-andforthequalitymanager.Nowtherealworkcanbegin.

tester'stotalcostintheappraisalcategoryortoseparateoutthefailureincrementsofcost(troubleshootingandretesting),basedentirelyonitsvaluetothecompanyqualitycostprogram.Thedecisionisnotnearlyasimportantasconsistencyinexecution.

Anotherproblemthatmaybefacedduringproceduredevelopmentisthesoundnessofke~,relatedcostaccountingpractices.Forexample,ifsomewaste(scrap)ISaccountedforbutsignificantamountsarenot,thecompanymaydecidetotightenuponthedefinitionorpractice.Ifsignif­icantcostsarebeingexpendedbecauseofcustomerproblems,andnotseparatelyaccountedfor,thecompanymaydecidethatnowisthetimetost~rtacco.untingforthem.Developmentofeachqualitycostprocedurewillprovidesomeuniqueopportunitiestorefinethecostaccountinadetailsforimprovedfinancialmanagement.b

Thesei.mproven:entsincostreportingmayactuallycausequalitycoststoshowanIncreaseIntheearlyphasesoftheprogram.Thismustbeunder­stood.fron:thebeginningtoprecludedisappointmentonmanagement'spart,Sll1ceItmaybeexpectingawindfallcostreduction(seethediscussiononcause-and-effectlagonpage40andFigure2.3inchapter2).

I~ternalcompanyqualitycostdefinitionsshouldbeapproachedinapractICalmanner.UsingAppendixB,"DetailedDescriptionofQualityCostElements,"asaguide,eachcompanyshouldtailorthesedefinitionstomeetitsownneeds(seediscussiononqualitycostelementsinchapter2,page33).Withexperience,qualitycostelementscanbecreateddeleted,orcombined.Thereisnopanaceaforqualitycostsystems.Eachsystemshouldharmonizetothegreatestextentpossiblewiththecompany~os~accountingsystem,anditshouldbesufficientonlytotheactualqual­ItyImprovementopportunitieswithinthecompany.

55 QualityCostProgramImplementatio/l

QualityCostAnalysisWiththesystemofcollectingqualitycostsimplemented,aspreadsheetisprepared,listingtheelementsofqualitycosttobecollectedagainstaspreadofthedepartments,areas,and/orprojectswherethecostswilloccur(seeFig­ure3.2).MicrosoftExcel®,Lotus1-2-3®,orQuattroPro®canbeusedtosim­plifythiseffort.Thisissetuptobeusedbyaccountingforeachreportingperiodandwillshowwhatqualitycostelementsarebeingreported(ornotbeingreported)byeachreportingarea.Thenextstepistocollate~hecol­lectedcostsontoasecondsheet,onedesignedtosummarizethedataInexactaccordancewithplansforuse(seeFigure3.3).Itisintheseformsthatthequalitycostdatawillnormallybepresentedtothequalitydepartmentforuse.

chapter.Thesecostelements(oraccounts)shouldbecodedinsuchawaythatthecostsofprevention,appraisal,andinternalandexternalfailurescouldbeeasilydistinguishedandsorted.ThecostelementsdescribedinAppendixBarecodedinsuchafashion.Thisiseasilyseeninthedetailedqualitycostelementsummary(FigureB.1)inAppendixB.

Usingsuchacodingsystem,ifallcostelementcodesbeginningwith1.weresortedandtotaled,thesumwouldbethetotalpreventioncost.Inalikemanner,thesumofthe2'swouldbethetotalappraisalcost,andsoon.Ifmoredetailisdesired,theseconddigitinthecostelementcodecouldrep­resentabreakoutoffurthersignificance.Forexample,allthe1.3codesinAppendixBrepresentpreventioncostspertainingtopurchasing.Additionaldigitscouldbeaddedtothecodes,dependingonthelevelofdetaildesired.

Collectionofqualitycostlaborbecomesrelativelyeasywithasystemsuchastheonejustdesclibed.Applicablequalitycostelementcodesareenteredonalabordistribution,charge,ortimecard,togetherwiththehoursexpendedagainstthecostelementsrepresentedbythecodes.Thelaborhoursaresubsequentlyconvertedtodollarsbydataprocessing.Anexcep­tiontothisisscrapforwhichthelaborhourscannotbecollectedonarealtimebasisforobviousreasons-youdon'tknowyouaremakingscrapwhileyouaremakingit.Theworkmustfirstbeinspected,rejected,anddispositionedbeforeitbecomesscrap.Inmanycompanies,existingscrapreportingdocumentsareforwardedtotheestimatingdepartment,wherethelaborandmaterialcostsexpendedtothestageofcompletionofthescrappeditemsareestimated.Thisdiffersfromwhatisgenerallytermed"replacement.cost,"orthecostoftheworkifthejobhadbeencompleted.Weareonlyinterestedhereinthelaborandmaterialdollarsactuallylostintheworkaccomplisheduptothetimeoftheworkbeingscrapped.

ChapterThree 54

(1uailtyCostfJrogramImplementatIOn';)/

Figure3.3.Qualitycostsummaryreport.

QUALITYCOSTSUMMARYREPORTFORTHEMONTHENDING

(InthousandsofU.S.d~

CurrentmonthYeartodate

DescriptionQualityAsapercentofQualityAsapercentof

costsSalesOthercostsSalesOther

1.0Preventioncosts

1.1Marketing/customer/user1.2product/service/design

development1.3Purchasingprevenfloncosts1.4Operationspreventioncosts1.5Qualityadministration1.6Otherpreventioncosts

Totalpreventioncosts

Preventiontargets

2.0Appraisalcosts

2.1Purchasingappraisalcosts2.2Operationsappraisalcosts2.3Externalappraisalcosts2.4Reviewoftestand

inspectiondata2.5Mise.qualityevaluations

Totalappraisalcosts

Appraisaltargets

3.0Internalfailurecosts

3.1Product/servicedesignfailurecosts

3.2Purchasingfailurecosts3.3Operationsfailurecosts3.4Otherinternalfailurecosts

4.0Externalfailurecosts

Totalfailurecosts

Failuretargets

Totalqualitycosts

Totalqualitytargets

BasedataCurrentmonthYeartodateFullyear

BudgetActualBudgetActualBudgetActual

Netsales

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ACTIVITY-BASEDCOSTING

58ChapterThree

Initially,thedatapresentedwillbeanalyzedoverasufficientperiodoftime,inconjunctionwithbasicqualitymeasurementdata,todetermineandverifycurrentopportunitiesforimprovement.Itisexpected,then,aspartofoverallqualityimprovementefforts,thattheseopportunitieswillbepresentedtotheorganizationsinvolvedfortheirunderstandingandcommitmenttoproblemidentification,causedetermination,andneces­sarycorrectiveaction.Atthispoint,improvementtargetscanandshouldbeestablished.

Rememberingthatqualitycostsareasupporttooltothequalityman­agementprogram,itshouldbeclearthatfurtherusesofqualitycostdatawillbeintegraltotheprimequalitymanagementorqualityimprovementprogram.Normally,thedatawillbeusedtodevelopindividualtrendchartstodepicttheinitialopportunity,thetargetsforimprovement,andtheactualprogressagainstthetargets(seeFigure3.4).Thedataarealsousedtoprepareoverallprogresscharts(usuallymonthlyorquarterly)forsubsequentusewithqualitymanagementreports(seeFigure3.5).

Oneofthebiggestpitfallstoavoidintheimplementationofaqualitycostprogramisapproachingitfromastand-alonepointofview.Qualitycostreports,eventotalqualitycosts,canhavenomeaningwithoutthebenefitofameaningfuldialogueaboutactualcompanyperformance­except,perhaps,asanactofflagwaving.

Althoughqualitycostscanbeidentifiedandcollectedwithintheframe­workofanyfinancialaccountingsystem,oneaccountingmethodispar­ticularlycompatiblewithqualitycostmethodologyandobjectives­namely,Activity-BasedCosting(ABC).TheaimofActivity-BasedCostingistoimproveoverallcosteffectivenessthroughafocusonkeycostelements.Qualitycostmethodologyseekstoassignquality-relatedcoststospecificactivities,products,processes,ordepartments,sothatthesecostscanbetargetedforreduction.The.useofABCtechniquesmakesiteasiertofindandassignthesecosts.Thelevelofdetailandtheinformationcontentinherentinconventionalaccountingpracticesareofteninsufficientforadequatequalitycostanalysisandapplicationtocontinuousimprovement.ABC,ontheotherhand,becauseofitsmoredetailedcostdatabase,isbettersuitedtotheseneeds.

QualityCostProgramImplementation61

QualityCostsandtheAccountingDepartmentOnceanorganizationdecidestoidentify,collect,andmonitoritsqualitycosts,itusuallyturnstotheaccountingdepartmentandsaysineffect,"Findmeallthecostsofquality"or"Tellmewhatwearespendingonprevention,appraisal,andfailure."Theaccountingdepartmentnormallycomesbackandsays,"Waitaminute!That'snotthewaywecollectourcosts.Wedon'thaveaccountingbucketscalled'prevention','appraisal,'or'failure'.Wedon'tcollectcostsinsuchcategories."Sothenextjobisusuallyforaqualityspecialisttositdownwithamemberoftheaccount­ingdepartmentandtogetherscantheexistingaccountingcategoriestoidentifythoseaccountsthatrepresentorcontaincoststhatarequality­related.Sometimesthisisrelativelysimpleandstraightforward.Forexample,theremaybeaninspectiondepartmentwhosetotalbudgetmayrepresentappraisalactivities,ortheremaybecostvariancesoroverrunscausedbyfailuretomeetadeadlineduetoaqualityproblem.Butinthevastmajorityor'casesqualitycostslieburiedandmustbeuncovered.Theyaretypicallyburiedinthestandardcost.Standardcostistheaverageplannedcostexpectedtobeincurredinagivenyearinthemanufactureofagivenproductorthedeliveryofagivenservice.Itconsistsofdirectlabor,directmaterials,andoverhead(seeAppendixA).Forexample,astandardcostforaproductmaybebasedonahistorical90percentyield,whichmeansabout10percentofthestandardcostrepresentsscrap.A10percentscraplevelisplanned.Thecostofscrapwouldshowintheaccountingledgeronlyifitexceededtheplanned10percentandwouldappearasacostoverrun.Thequalityspecialistandtherepresentativeoftheaccountingdepartmentmustdevisenewaccountingcategoriestoiden-

tifytherealcostofscraporrework.Ontheotherhand,thestandardcostmayrepresentaprocesswhosecycle

timeandlaborcontentisgrosslyinflatedbytheinclusionofnonvalue-added

Activity-BasedCostingisanaccountingprocedureforallocatingthecostofindirectandoverheadexpenses(thecostofanorganization'sresources)tospecificactivitiesinproportiontotheuseofagivenresourcebythatactivity-thisisincontrasttoconventionalaccountingpractice,whichallocatesindirectandoverheadexpensesinproportiontodirectcostsincun-edbyanactivity-Inthesectionsthatfollow,weshallsee,throughexamples,theimplicationsofthisaccountingdifferenceandhowABCcanfacilitatetheuseofqualitycoststoachievecontinuousqualityimprovement.

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HowOverheadCostsAreAssignedtoProductsorServicesTowhatcostsarewereferringwhenwespeakofoverheadandindirectcosts?Figure3.6showshowcostscanbeincurredatvariouslevelsinanorganizationmanufacturingaproduct.Similarconsiderationsapplyfordeliveringaservice.

Somecostscanbeassigneddirectlytospecificunitsofproductorser­vice.Thesetypicallyarecostsofthelaborhoursexpendedorthecostofincomingmaterialsorenergyconsumedtoproduceaunitofoutput.Thesearecalled"directcosts"andatonetimerepresentedbyfarthelargestfrac-

steps,suchaswaitingformissingassemblypartstoarriveorwaitingfarinformationtofulfillanorderinaretailoperation.Intheseexamples,thequalityspecialistandtheaccountingrepresentativemustbreakdownthelaborcostsforassemblingaproductintothoserepresentingactivitiesthatareessential,suchassolderingalead,andthosethatdonotaddvalue,suchasmovingabatchofcircuitboardsintostorage.Intheseexamples,thedirectlaborormaterialcostsincludedinthestandardareseparatedintomaterialorlaborcoststhatareassociatedwithanidealproductorprocessandthosethatrepresentwaste.Notethatwearedealingintheseexampleswithdirectcosts.Thebreakoutofqualitycosts,whilenotalwayseasy,isatleastconceptuallys.ound.~ilethegreaterlevelofdetailinABCmaymakethecostsepara­tIOnseaSler,theycanneverthelessbecarriedoutwithconventionalcostaccountingdata,accompaniedbyjudiciousdecisionsastowhatconstituteswaste.However,thesituationchangeswhenitcomestooverheadcosts.Con­ventionalaccountingproceduresoftenleadusintodoingsomethingsthatreallydon'tmakesenseinassigningoverheadcosts.

Figure3.6.Levelsatwhichcostsareincurred.

63

tionofthecostofaproductorservice.Othercosts,suc~~scosto~settingupproductionforabatchofproductor~hipping?rrecelVlngmultlplelotsofproduct,arenotassignableattheU~ltlevel,Slilcetheymaydependonbatchorlotsize.AwaymustbedeVIsedtospreadthesecostsoverthe

'ItSproduced.Therearestillotheractivitiesthatfallintothecategoryof un.1.supportservicesforseveralproductsorservices.AnexampleIScompamthandling;anotherispurchasing.Finally,thereareexpensesth~tare.curredatthefacilitylevelthatmustbepaid,whetherornottherelSany1Dfd' output-suchexpensesaspropertytaxes,de~reciationo·pl~nt,anInsur-ance.ExceptforthosecostsincurredandassIgnedattheumtlevel,alltheothercostsshowninFigure3.6areoverheadcosts..

Overheadcostsarethosecostsincurredtosupportproductmanufac­turingorserviceoperations(seeAppendixA,p.179and181).Theycon-

sistofthreeparts:1.Indirectmaterialcosts-Thesearethecostsofsuppliesconsumed

inoperationsbutarenotdirectlyapartoftheendproduct,such

as,shippingmaterialsandperishabletools.

2.Indirectlabor-Thesecostsnormallyrepresentthewages.of.employeeswhodonotworkontheendprodu~toronde~1Yenngtheprimeservicebutwhosupporttheproductionorserviceprocess,suchassupervisors,operationssupportpersonnel,and

maintenancepeople.

3.Fixedandmiscellaneousexpenses-Theseincludedepreciation,

taxes,r~nt,warranties,andinsurance.

Overheadcostsinconventionalaccountingpracticeareincorpor~tedintothestandardcostandaredonesoinproportiontotheamountofd~rectlabor(orsometimesinproportiontomachinehours~rdirec~~atenal~)alreadycontainedinthestandardcost,i.e.,.consu~e~mprovIdmgaumtofoutput.Themoredirectlaborinvolved1llprovldmgaproduct~rser­vicethemoreoverheadexpenseisassignedtothatproductorserVlce.Inthe~aseofusingdirectlaborcontenttoapportionoverheadcosts,the

directlaborcanbesaidtobea"costdriver".Let'sconsideranexampleofaplantthatmanufacturestwoproducts,

"shafts"and"housings",andseehowanindirectexpen~e-namelY,"materialhandling"-isassignedusingconventionalaccountmgmethodsandusinaActivity-BasedCosting.Thebasicparametersoftheproblemaresum~arizedinFigure3.7.Thedatarepresentasinglemonth.

QualityCostProgramImplementation-------~::.=:'--~~~-------'-----

DirectmaterialsEnergyusageMaterialhandlingShippingandreceivingEngineeringchangesComplaintinvestigationInsuranceMaintenance

DirectlaborMachinehoursSetupSchedulingRedesignBillofmaterialsPropertytaxesDepreciation

ChapterThree

Facilitysupport

Batch

Productsupport

Unit

62

Figure3.7.Materialhandlingmonthlyexpensedata.

[0.25hoursx$1.20perhour=$0.30(shaftorhousing))

Thisistruedespitethefactthat,inreality,thereismorematerialhandlincrinvolv~dintransportingtheshafts(4loadsforhousingsvs.2loadsforshafts).

65 QualityCostProgramImplementation

[$20.00/100shafts=$0.20pershaft]

[$40.00/100housings=$0.40perhousing)

Thisisamoreaccurateassignmentofcoststhaninthecaseofconven­tionalaccountingpractice.

NowyouwillnotefromFigure3.7thatthelaborrateis$15.00perhourand0.25hoursisrequiredtomanufactureashaftorhousing-thatis,$3.75.Youcouldarguethatitdoesn'tmakeagreatdealofdifferenceifanadditional$0.20,$0.30,or$0.40isaddedformaterialhandling.Andyouwouldprobablyberight,especiallysinceinthecaseofthisoverheaditemtheoverheadrateisonlyanaverageof8percent.Thisiswhycon­ventionalaccountingmethodshaveworkedinthepast.Overheadhasrep­resentedonlyasmallproportionofdirectexpense.But,intoday'sworld,withautomationandcomputer-controlledprocesses,thedirectcostsareoverwhelmedbyindirectcostsandotheroverheadexpenses.1Itisnotuncommonforoverheadratestobeseveralhundredpercentofdirectlaborcosts.Underthesecircumstances,itisvitallyimportanthowweassignoverheadcostsifwearetohaveahopeofcontrollingandreducingthem.

Intheexample,materialhandling,andspecificallythenumberofloadstransported,isacostdriver.Inreality,therearemanycostdrivers,suchaspurchaseorders,machinesetups,complaintinvestigations,main­tenancecalls,engineeringchanges,andlostitems.Foreachcostdriver,anoverheadrateisdeterminedbydividing.totalcostsforthedriver(forexample,total'costsforallcomplaintinvestigations)bythenumberofdri­verevents(forexample,thenlimbetofcomplaintsinvestigated).Theresultsmightbe,forexample,$70permachinesetup,$650percomplaintinvestigation,and$65permaintenancecall.Theseratescanthenbeappliedtospecificproductsorservices,recognizingthatdifferentprod­uctsusevariouscomponentsofoverheadatdifferentlevelsor,insomecases,maynotusethematall.Forexample,ifitcosts$650toinvestigateacomplaint,andtherearetencustomercomplaintsassociatedwithshaftsinagivenmonth,thenABCrequiresanassignmentof$6500oftheover­allcustomercomplaintexpensetoshaftsforthattimeperiod.

Allofthisseemslikealotmoreworkfortheaccountingoffice.Atonetime,thatwouldhavebeentrue.However,withthecomputerizationthatnowexistsinallstate-of-the-artaccountingdepartments,itisonlytheini­tialsetupoftheaccountsthatrequiresmoreaccountingwork.Afterthat,everythingisautomatic,and,assumingproperdataentry,accuratedetailedcostinformationisavailableonrequest.

ChapterThree

Directlaborhours'=10,000Totaldirectlaborcost@$15perhour'=$150,000Laborcontentofshaftsandhousings'=0.25hours

Numberofloadstransported'=1200Materialhandlingexpense@$10perload'=$12,000Materialhandlingrequirement:

Shafts'=2loadsper100piecelotHousings'=4loadsper100piecelot

64

EnterActivity-BasedCosting

ABCassignscostsofresourcestoactivitiesinproportiontotheuseoftheparticularresourcebyeachactivity.Hence,intheexample,the$12,000monthlycostofma.terialhandlingisallocatedas$10.00toeachload.

Themonthlymaterialhandlingexpenseis$12,000.Sincethereare10,000hoursofdirectlaborexpendedintheplanteachmonth,eachdirectlaborhouralsocarriesamaterialhandlingoverheadchargeof$1.20perhour.

[$12,000/10,000hours=$1.20perhour)

Thedirectlaborcontentofthesetwoproductsisidentical,at0.25directlaborhours;eachshaftandhousing,therefore,isallocated$0.30materialhandlingcharge.

[$12,000/1200loadscarried=$10.00perload]

Thenumberofloadstransportedbecomesthe"costdriver,"incontrasttothedirectlaborcontent.Sincethehousingsrequirefourloadsat$10.00perload,or$40.00,totransporta100-piecelot,asopposedtoonlytwoloadsat.$10.00perload,or$20.00,totransporta100-piecelotofshafts,ama.tenalhandlingcostof$0.40isallocatedtothecostofproducingahousmg,whereasacostof$0.20isallocatedtothemanufactureofashaft.

FromCostDriverstoRootCausesInanorganizationusingActivity-BasedCosting,aninternalfailurecostof$24,000hasbeenidentifiedforagivenyearassociatedwiththeman­ufactureofitstwoproducts,shaftsandhousings.Thisinternalfailurecostisaresultofreworkingproduct,whichaccountsfor$9600,or40percentoftheinternalfailurecost,andofscrappingproduct,whichaccountsfor$14,400,or60percehtoftheinternalfailurecost.Forvar­iousreasons,differentpercentagesofshaftscouldbereworkedascom­paredwiththoseofhousings;hence,thepercentagesscrappedarealsodifferentforthetwoproducts.ReworkandscraparecostdriversinABCterms.

Figure3.8showshowcostsareassignedtothetwoproducts,shaftsandhousings,inproportiontotheextentthateachproductconsumesthat

67 QualityCostProgramImplementation

100%

40%

Figure3.8.Internalfailurecostsbreakdown-shaftsandhousings.

driver-thatis,usesreworkresourcesoraccountsforscrap.Buttheansa~~~sisneednotstophere,becausewecanandshouldaskwhatth~caus;hreworkandscrapare,inthecaseofboththesha~tsandhO~S1l1gs.esecaUsesareals6shOwninFigure3.8.Thesearednv~rs?fdnvers,orse~­ondorderdrivers.Weseeatotalofsevencausesdlstnbutedamongte

ChapterThree

UsingActivity-BasedCostingtoIdentifyandAnalyzeQualityCostsWhileABCmakespossiblemoreaccurateassignmentofalloverheadcostsandcanlead,forexample,tomorecorrectproductorservicepricing,itoffersaspecialbenefitintheareaofqualitycosts-namely,thebetteriden­tificationofthoseactivitiesthatcanleadtoqualityimprovement.Forexample,inthecaseofcustomercomplaints,wearealreadytalkingaboutaqualitycost(externalfailure):Itisimportantforpurposesofproblemsolvingandcontinuousimprovementthatweknowwhatportionofthecustomercomplaintcostisassignabletoshaftsasopposedtohousings.

Inconventionalaccountingpractice,wecanalwaysgetthisinforma­tionbygoingtothecustomerservicedepartmentandsortingthroughitscomplaintrecords.Theproblemisthatthiseffortgetsmultipliedmanytimesoverwhenweconsiderthenumberofdifferentproductsandthenumberofdifferenttypesofqualitycostswithwhichweareconfronted.

Inaddition,thistaskwouldhavetoberepeatedatregularintervals,suchas,everymonth,whereasinActivity-BasedAccounting,thisbreakouthasalreadybeendoneforus.Moreover,theprocessthatidentifiesandquantifiesthemanycostdriversinanorganizationprovidesadatabasethatnotonlyletsusfindandproperlyassignqualitycostsbutalsohelpsustotakeapartthesequalitycosts,sothatwecangofromcoststocostdrivers,fromcostdriverstodriversofcostdrivers,andultimatelytorootcauses.

Intheory,weshouldbeabletoassignaqualitycosttoarootcauseofaqualityproblem.Thisprovesextremelyvaluable,sincewecanthencal­culatethereturnoninvestmentandthepaybacktimeforinvestingtofixarootcause.Thefollowingexamplewillillustratethistypeofanalysis.

66

ConclusionTheuseofActivity-BasedCostinginconjunctionwithqualitycostanaly­sisoffersseveraladvantages:

1.Overheadcosts,whichmayrepresentbyfarthelargestportionofthecostofaproductorservice,canbeaccuratelybrokendownandassignedtotheproduct,department,process,oractivitythatisresponsibleforthesecosts.Thecomputerizationofcostsystemshasgreatlyreducedthecostofobtainingmoreaccurateinforma­tioncharacteristicofActivity-BasedCosting.

69 QualityCostProgramImplementation

UsingABCtoIdentifyQualityCostsAfive-stepprocesshasbeenrecommendedbyD.W.Webster

3forusing

Activity-BasedCostingtoidentifythecostsofpoorquality:

1.Identifyallactivities,(appraisalandprevention),andresults(internalandexternalfailures).

2.Determinetheactivitycostsassociatedwithpreventionandappraisaltasks,andwithinternalandexternalfailures.

3.Identifytheactivitiesthatbenefitfrompreventionandappraisalactivitiesandthatcauseinternalandexternalfailures.

4.AssigntheActivity-BasedCostofqualityasappropriate.Assignthecostofpreventionandappraisaltotheactivitiesthatbenefitfrompreventiqnandappraisal.Assignthecostsofinternalandexternalfailurestotheactivitiesidentifiedastherootcausesofthesefailures.

5.Adjustthecalculatedcostsofproductsandservicestoreflecttheseadditionalcostsofquality.

GiventhelevelofcostdetailavailablefromABC,itispossibletoesti­matethecostimpactoffixingacause.Intheexamplecited,$10,560isaresultof"damage"tobothshaftsandhousings.If75percentofthedamagecouldbeeliminatedthroughidentifyingandcorrectingrootcauses,asavingsof$7920peryearwouldresult.Theestimatedsavingscanthenbecomparedtotherequiredinvestment.Intheexample,ifaninvestmentof$4000isrequired,thepaybackperiodfortheinvestmentcanbecalculated-inthiscase,$40001$7920,orapproximatelysixmonths.ThelevelofdetailinherentinActivity-BasedCosting,thus-enablescost-benefitanalysisandprovidesforsoundinvestmentdecisionmakingforcontinuousqualityimprovement.

2

$6,000+-+y;ffiJ-------------------iIDSeries1I

$4,000+-Hi;ii1f---

ChapterThree

$2,000+-1..f------j't---j1----1.\-----------1

$12,000r------------------~

$10,000

twoproductsaccountingforeitherreworkorscrap.Weessentiallydividethecostsofreworkandscrapintothecostsassociatedwiththefactorsresponsibleforthereworkandscrap.

ThecostsattributabletoeachcauseareshowninFigure3.8andaresummarizedinFigure3.9,wheretheyarealsodisplayedinParetofash­ion.Fromaqualityimprovementperspective,thebiggestpaybackwouldresultfromfindingthecausesof"damage"andcorrectingthem.Thismightrequiretheidentificationofanotherlevelofcausesandcostdrivers.Perhapssomeofthesedriverswillprovetoberootcauses.

ClJ01'"'"'"~ 01Ct·ru52 ru

E'c2-2~~illQ

ClJCiCi ru"Dru>-

0E013\::0 01CE .S5:~0

-503\ ru--' ruIX:

:2~ --'

1Damage$10,5602Joining$4,3203Lathingdefects$3,3604Rawmaterials$3,3125Missingscrews$1,4406Loosescrews$7207Assemblyerror$288

Figure3.9.Causesoffailure.

70ChapterThree

2.~great~anyqualitycostsareintheoverheadcategory,ratherthanIIIthedIrec~categor~.Thi~isparticularlytrueof"hidden"qualitycosts-~hatIS,thoseIlltanpblecoststhatdonotfittheconventionalc~tegones~frework,scrap,warranties,etc.(SeethediscussionofhId?enqualItycostsonpage7).WithABC,theymaybeaccuratelyaSSIgned.

3.Withtheproperassignmentofoverheadcosts,thecalculationofthecost~fpoorqualitychangesandoftenaffectstheidentificationofthevI.talfew~reasforqualityimprovement.ThisimpactsprojectselectIOnandInvestmentdecisions.

4.Distinctions?etweenhigh-performingdepartmentsorprocessesandlow-perfonmngd~partmentsorprocesses,withrespecttoquality,becomemoreObVIOUSwhenoverheadisproperlyallocated.

5.Thechangesinqua!itycostsover"timecanbemorerealisticallyg~u~edwhentheartIfactsofarbitrarilyassignedoverheadcostsareelImmated.

6.~o~valu~-addedandnoncost-effectiveactivitiescanbemoreread­I!yIdentIfiedandeliminated,thusleadingtoimprovementsincycletIme,aswellasinqualityandcosts.

Chapter4

UseofQualityCosts

QUALITYIMPROVEMENTANDQUALITYCOSTSOncethequalitycostsystemisinstalled,itsprincipaluseistojustifyandsupportqualityperformanceimprovementineachmajorareaofproductorserviceactivity.Performanceimprovementstartswiththeidentificationofproblems.Inthiscontext,aproblemisdefinedasanareaofhighqual­itycost.Everyproblemthusidentifiedisanopportunityforprofitimprovement,becauseeverydollarsavedinthetotalcostofqualityisdirectlytranslatableintoadollarofpretaxearnings.

Chapter5,"QualityImprovementandQualityCostReduction,"describestechniquesforusingqualitycostdatainprogramstoimprovequality,reducecosts,andtherebyimproveprofits.Chapter5clearlyiden­tifiesthattheeffectiveuseofqualitycostsmeansfullintegrationwiththequalitymeasurementandcorrectiveactionsystem.Fundamentally,qual­itycostmeasurementsareestablish::dforeachmajorproduct/servicelineorcostcenterwithinthetotaloperation.As!hesemeasurementsbecomeanintegralpartofthequalitymeasurementsystem,coupledwiththeiden­tificationandeliminationofthecausesofdefects,theyhavelogicallycometoprovidethelanguageforimprovementpotentialandgoals.

Actualprogressinqualityimprovementandqualitycostreductionscannotbelegislated.Itmustbeearnedthroughthehardworkprocessofproblemsolving.Therearemanymethodsfortheanalysisofqualitydata,butitalsorequiresknowledgeofcompanyoperationsandtheprocessesinvolved.Knowledgeofbasicstatisticsandproblem-solvingtechniquesarealsoimportant.Onceacauseinneedofcorrectionisidentified,the

71

Anotherimportantuseofqualitycostsisitsuseasanintegralpartofqualitymanagementreporting.Qualitymanagementreportsareusedtoreportquali~yprogressandtofocusattentiononareasneedingimprove­ment.Theyareusedtoinformmanagementofoverallstatusand,inamoredirectmanner,topromoteandsupportneededactionineachmajorarea.Withoutqualitycostsasafocalpointfordemandingactionandreportingprogress,qualitymanagementreportingwouldbeamorediffi­culttask.Thereisnobetterwaytomeasuretheoverallsuccessofthequal­ityimprovementprogram.Ifimprovementisbeingachieved,problemsarebeingresolvedandqualitycostsarebeingreduced.

actionnecessarymustbecarefullydetermined,anditmustbeindividuallyjustifiedonthebasisofanequitablecosttrade-off,forexample,a$200perweekreworkproblemversusa$5000solution.Atthispoint,experienceinmeasuringqualitycostswillbeinvaluableinestimatingthetruepaybackforindividualcorrectiveactioninvestments.Costbenefitjustificationofcorrectiveactionisanongoingpartofthequalitymanagementprogram.

ItshouldberecognizedthatthegenerationofelTorsanddefectsisnotlimitedtooperationspersonnel.Errorsthatresultinwasteandreworkareoftencausedbyproduct/serviceandprocessdesignengineers,bythedesignersandfabricatorsoftoolsandoperatingequipment,bythoseindi­vidualswhodetermineprocesscapabilities,andbythosewhoprovidethewritteninstructionsfortheoperator.Also,errorsthataffectproductorser­vicecanbecausedbythecalibrationtechnician,themaintenanceperson,oreventhematerialhandlers.Clearly,almostanyonewithinthetotaloper­ationcancontributetofailurecosts.Effectivecorrectiveaction,therefore,canandwilltakemanyavenuesthroughouttheoperatingorganization.

Someproblemshavefairlyobvioussolutionsandcanbefixedimme­diately,suchasthereplacementofawornmachinebearingoraworntool.Othersarenotasobvious,suchasamarginalconditionindesignorpro­cessing,andarealmostneverdiscoveredandcorrectedwithoutthebene­fitofawell-organizedandformalapproachsupportedbyrelatedcosts.Marginalconditionsoftenresultinproblemsthatbecomelostintheacceptedcostofdoingbusiness.Havinganorganizedcorrectiveactionsystemjustifiedbyqualitycostswillcausesuchproblemstosurfaceformanagement'svisibilityanddemandforaction.

Thethingtorememberaboutcorrectiveactionisthatyouonlyhavetopayforitonce,whereasfailuretotakecorrectiveactionmaybepaidforoverandoveragain.

Iiii:1

il

il

II

73 UseofQualityCosts

Onemissionofthequalitymanagementfunctionistoeducatetopman­agementaboutthelong-rangeeffectsoftotalqualityperformanceontheprofitsandqualityreputationofthecompany.Managementmustbecomeconvincedthatstrategicplanningforqualityisasessentialasplanningforanyotherfunctionalarea.Unlesstheingredientofqualityistrulybuiltintocompanyoperationsfromthefirstconceptofanewproductorser­vicetotheultimatesatisfactionofitsusers,allofwhichmaytakeyears,acompanycannotbetrulyconfidentaboutthedegreeofactualcustomersatisfactionthatwillbeachieved.

Thestrategicplanningprocessfocusesoncosts.Itismanagement'swayofsubstantiatingfutureprofits.Becauseitiscost-oriented,thecostofqualityallowsthequalityfunctiontoreadilymeetthechallengeofinclusioninthisimportantplanningactivityforthecompany.Qualitycostsallowtheeffectofthemanagementofqualitytobecostquantified.Itfurtherallowsqualitycoststobeconsideredintheplansandbudgetsforeachdepartmentorareawheretheyoccur.Thus,qualitycostsystemscanbeviewedasthebreakthroughthatallowsthequalityfunctiontobecomeabonafidememberofthecompany's(cost-oriented)manage­mentteam.

Thestrategicplanningprocessinvolves,ingeneral,areviewandananalysisofpastperformanceandpresentposition;theestablishmentofbusinessobjectivesbasedonactualcurrentoranticipatedconditions;theelectionofspecific,strategicactionplanstoachievetheobjectives;andtheimplementationandmonitoringphase.Thequalityfunction'sroleinthisprocessshouldbeto

QUALITYCOSTSANDTHESTRATEGICBUSINESSPLAN

Whenqualitycostsarebeingusedinqualitymanagementreports,cau­tionshouldbeexercisedinattemptingtocomparedifferentproduct/servicelinesoroperationsareas.Peopleinexperiencedinthewaysofqualitycostsprobablyhaveatendencytocomparecomplexoperationswithrelativ~ly

simpleonesandexpectsimilarresults.Thiscanneverbe.Areaspushmgthestateoftheartandnewactivitiesingeneralwillhavehigherqualitycostsasapercentageofsomebasethanwillmature,well-perfonningoper­ations.Thereisalwaysadangerincomparingqualitycosts.Itpaystokeepthefocusonreduction,regardlessofstaJtinglevel.

ChapterFour 72

74ChapterFour

•AnalyzemcUortrendsincustomersatisfactionde<:ects. tdl',11orenol'raes,anquaItycostsbothaenerallyandb'fi .'"",yspeCIICproarampro~ect.T~es~trendsshouldalsobeusedtoprovideinputs""f,settIngObjectIvesor

•:4S~iS~ot~erfu~ctionstoensurethatcostsrelatedtoqualityareInCuedInthel[analysesforsettingobjectives

•Deve!opanov~rallqualitystrategicplanwhichincorporatesallf~nctlOnalquahtyobjectivesandstrategicactionplansincludinapansandbudgetforthequalityfunction'""

Thereisnobetterf,h.stakeinth"wayortequalItymanagementfunctionto"putitsbyquality~;s~~::~t~h~ntOt~~ve~opastrat~gicqU~lityplansubstantiatedbusinessplan.aveISpancommIttedtoIIItheoverallcompany

SUPPLIERQUALITYCOSTSSupplierqualitycosts,iftracked,canbesignificantandcanbegood'd'catorsofproblAIn1-

titycostsfOll0:~:~e~:tho~s::~:s~:~~;i;a~~~~~~t~i~g:~~::~~ri~:yl-00,arecategorIzedasf'""',

inchater2preven1O~,appra~sal,andfailurecosts,asdefinede1eme~t'~ages31-33.SupplIerqualItycostsincludepreventioncostmentsSS~C~I~S~sthecostofsu~p~ierqualitysurveys;appraisalcostele-

,hecostsofreCeIVIngandSourceinspection-andf'1costelementsh'aIure

.'sucasthecostofdispositioningnonconforminaur~hasedmatenal,thecostsofscrapandreworkofsupplier-causedn;n~on~ormances,andthecostofsitevisitstocorrectsupplierserviceproblems.

HiddenSupplierQualityCosts

~~ereares~Ipplierq~a1itycoststhatareapparentandrelativelyeasytoiden­

~~n~~~:~SI~tovanoussuppliersbyt~ebuyer,suchasthoseexamplesjustthereare:owever~therea~ealsohIddensupplierqualitycosts,justas

RddhIddenq.ualItyC?stsIIIanyqualitycostsystem(seepage7).1ensupplIerqUalItycostsaredividedintothreeparts:

•Thoseincurredbythesupplieratthesupplier'sfacility

•Thoseincurredbythb.l' <:"euyerInsoVIngproblemsatthesupplier'slacI1Ity

•Thoseusuallynota~locatedtosuppliersbutincurredbythebuyerasaresultofpotentIaIoractualsupplierproblems

UseofQualityCosts75

Qualitycostsincurredbythesupplierattheirfacilityareunknowntothebuyerand,therefore,hidden.Eventhoughthemagnitudeishidden,thetypesofcostsarenot.Theyarethesametypesofqualitycoststhebuyerincurs.Forexample,thesuppliercertainlyhaspreventionefforts.Iftheymakeaproduct,theyhaveexpensesrelatedtothequalityengineer­ingoftheproduct.Evenifthesupplierisasmallshop,thistaskmustbedonebysomeoneandmayverywellbehandledbytheproductionsuper­visoriftheplantlacksaqualityengineeringstaff.Certainly,effortisexpendedintheappraisalarea,evenbythesmallestsuppliers.Someonemustinspecttheproductorservicepriortodelivery.(Inaone-personshop,thisisdonebythepersonwhomadetheitem.)Also,eachshop,whetheritislargeorsmall,hasfailurecosts.Whenthesuppliermakesamistakeinmanufacturing,theymusteitherreworktheitemorscrapit,causinganinternalfailurecost.Ifthesuppliersendsittothebuyer,itmayberejected,creatinganexternalfailurecostforthesupplier.Ifthesupplierisperformingaserviceandthebuyerisnotsatisfied,thesuppliercaneitherredotheworkorreplacetheoriginalproductwithanewone(forexample,adrycleanerruiningagarment),bothexternalfailurecosts.

Thesecondtypeofhiddencost,thatwhichisincurredbythebuyerinsolvingproblemsatthesupplier'sfacility,isusuallynotspecificallyallocatedtosuppliers.Exceptforanawarenessoftroublesomesuppliers,thereisusuallynotabulationofthecostoftheeffortorthetravelexpensesinvolved.Therefore,theactualexpenseishidden.Anexampleisthecosttothebuyerofsendingaqualityengineertoasuppliertoresolveacrisis.

Thelasttypeofhiddenqualitycostoccursatthebuyer'sfacility.Thistypeofcostmayincludethefollowing:

•Specifyinganddesigninggagesthatmustbeusedbythebuyer'sreceivinginspectionand,perhapsaswell,bythesupplierpriortoshipping

•Designingappropriatespecificationsthatthesuppliermustfollowinthemanufactureoftheproductortheperformingoftheservice

•Addingspecialinspectionoperationsandqualitycontroleffortinthebuyer'sproductionlinerelatedspecificallytoasupplierproduct

•Reviewingtestandinspectiondataonsuppliermaterialtodetermineacceptabilityforprocessinginthebuyer'sfacility

77 UseofQualityCosts

10HoursInvestigationTimex$20=$200

Noattemptwasmadetoincludeallsupplierqualitycostsbecauseoftheadministrativeproblemsinvolved.Therefore;thosecoststhatwereimpor­tantforthisparticularcompanywereidentified.

CostofProcessingIncomingRejections.Throughaspecialstudy,itwasdeterminedthateachrejectedlotofmaterialrequiredapproximately$100ofexpensetodocumentandreturntothesupplier.Therefore,thetotalcostofasupplier'srejectedshipmentsoveraperiodoftimewasestimatedtobethenumberofrejectedlotsforthesuppliermultipliedby$100.

Example

2RejectedLotsx$1OO/RejectedLot=$200

CostofComplaintInvestigations.Asonemightanticipate,aspecialstudyofthetimeneededtoinvestigatecomplaintsshowedthatthiscouldnotbeestimatedtoanydegreeofaccuracy.Therefore,eachengineerwasaskedtodocumenttheinvestigationtimerequiredforeachsupplier.Thetotalcostofcomplaintinvestigationswasestimatedtobetheinvestigationtimeforthatsuppliermultipliedbytheaveragehourlywagesandfringebenefitsofanengineer.

Example

ASupplierRatingProgramUsingQualityCostsOnesuccessfulapplicationofqualitycostsinasupplierratingprogramhasbeeninoperationforseveralyearsbyanelectricalproducts~anufac­

turer.Althoughnottheoreticallyperfect,thissystemhasprovenItseffec­tivenessinimprovingsupplierquality,anditiscertainlyanoutstandingexampleofapracticalandworkableapproach.Thec~mpany.~ctuall'yusesadualsupplierratingsystem.ThefirstportionisqllltetradItlOnalmthatittrackspriceanddelivery,anditwillnotbediscussedhere.Thesecondpart,however,evaluatessupplierquality.costperformanceforeachsup­plier,usinganindexbasedonthefollow111gformula:

SupplierQualityCost+PurchasedCost QCPI==-=.!:~---=-"~--"------::-::::-----­PurchasedCost

andincominareJ·ectionratethesupplierratingsystemshouldalso ery,b,.....

incorporatesupplierqualitycostsasdescnbed111thefollow111gexample.

ChapterFour 76

•Calibratingandmaintainingequipmentnecessaryinthequalitycontrolofsuppliermaterial

•Losingproductiontimeduetounavailabilityofgoodmaterial

•FieldengineeringrequiredtoanalyzeandCOlTectaproblemcausedbyasupplier

Itmustberememberedthatthisdiscussionofthetypesofsupplier­relatedhiddencostsisbynomeansexhaustive.Therearemanymore,someofwhichmaybesignificantinanindividualsituation.

ApplicationofQualityCoststoSupplierControlInitially,thebuyer,inordertoreducesupplier-relatedqualitycosts,mustdetenninewhatcostsareimportant.Comparingtherelativemagnitudesofqualitycostsbycategoryandelementshouldbethefirststep.Thecompany'squalitycostprogramcouldbeaninvaluableaidtoaccomplishingthisanaly­sis.Forexample,assumeasituationinwhichpurchasedmaterialrejectionsarethebuyer'sbiggestproblem.Ifthebuyerhasreasontobelievethatqual­itycostswillbeloweredthroughimprovementsinthepurchasedmaterialrejectionrate,thenthisistheimportantitemforthiscompany.

ThenextstepistodoaParetoanalysis(seechapter5)todeterminewhichsuppliersarecausingtheproblem.Verylikely,thenitwillbefoundthatrelativelyfewsuppliersarecausingmostoftheproblems.Thenthebuyercanfocuseffortonthe"vitalfew"suppliersandtakeappropriateaction.

Whatisappropriateaction?Thebuyermightconvincethevitalfewsup­plierstoinstitutequalitycostprograms,ifpracticalforthem.Discretionmustbeexercisedbeforeinsistingonthis.Somecompaniesmaybetoosmalltosupportaqualitycostprogram.Specialcircumstancesmayexistinothercompaniesthatwouldprohibitthisaction.However,ifasupplierfindsthatlaunchingsuchaprogramisfeasible,thecostsmostvisibletothebuyermostlikelywillbereducedbydoingso.Ifthesecostsarereduced,thehiddencostsexpendedbyboththebuyerandIhevitalfewsuppliersshouldalsobelow­ered.Theresultwillbethatthequalityofboththesupplier'sproduct/serviceandthebuyer'sproduct/servicewillimprove.Thisshouldincreaseprofitsforboth.Also,improvedprofitabilityforthesuppliermayeventuallyresultinlowerpricesforthebuyerinacompetitivemarket.

Whatotheractioncanbetakenifweknowthemagnitudeofthesup­plierqualitycosts?Itispossiblethatthesecostscanbeincorporatedintoabuyer'ssupplierra.tingsystem.Besidesthetraditionalinputsofprice,deliv-

1.00Std.HourlLotsx$15/Hourx50Lots=$750

Arankingofsupplierssupplyingsimilarpartsbyqualitycostperfor­manceindexfollows.

SupplierQualityCost.Thiscompany'ssupplierqualitycostforthesup­plierinquestionequalsthesumofitscostsof

79

1.0241.0491.0641.2041.917

Index(QCPI)

UseofQualityCosts

99,92840,00043,64312,2307,631

PurchasedCost($)

Interpretation

ExcellentGoodFairPoorImmediatecorrectiveactionrequired

1.000-1'.0091.010-1.0391.040-1.0691.070-1.0991.100+

Index(QCPI)

A2410B1950C2800D2500E7000

SupplierSupplierQualityCost($)

Theactualassessmentusedbythiscompanywas

ExampleofindexcalculationforsupplierA

SQCost+PurchasedCost=$2410+$99,928=1.024QCPI=PurchasedCost$99,928

Thecompanyalsodevelopedamethodofinterpretingt.hequalitycostperformanceindextoassesseachsupplier.AperfectsupplIerwouldhavenoqualitycosts,sincetherewouldbenoreje~tions,therewouldbenocomplaintinvestigations,andreceiving.inspectlOnwouldbeunnecessary.Therefore,theindexforaperfectsupplIerwouldbe

SQCost+PurchasedCost=0+PurchasedCost=1.000QCPI=PurchasedCostPurchasedCost

••Ch·panywastoobtainimme- UsinGthisassessment,firstpnontylortIScomdiatebcorrectiveactionforsuppliersDandE.Resultsfort~eoverallpro-

.wl·ththepercentaGeoftotalsupplIersratedgood Gramwereencouragmg,b.1.t~rbetterincreasingfrom75percentto80percentandsupplIerquaiy

costsreducing8.5percent:inthe~rstyear·b

dlopedforusinGqual-ManyvariationsandmnovatlOnscaneeve.c:

H..dislessimpor- itycoststoevaluatesupplierperf~rmance:owit~shonerer-relatedtantthantherecognitionoftheSizeandimpact0tesuppi

ChapterFour

Processingincomingrejections=$200Complaintinvestigations=200Processinginreceivinginspection750Defectiveproductafterreceivinginspection=180

Supplierqualitycost=$1330

78

CostofaDefectiveProductafterReceivingInspection.Thiswasthemostdifficulttoevaluate,becauseadefectiveproductcouldbeeitherreworkedorscrapped.Ifscrapped,thecostmightriotberecoveredfromthesupplier,dependingonhowclearlyresponsibilitycouldbeassigned.Also,whenadefectivepartisfound,sortingtheremainingpartsinthelotmightbethebestalternative.Fortunately,aspecialstudyindicatedthat,nomatterwhatactionwastaken,thepurchasedcostofthatpartprovidedanacceptableestimateofthequalitycostsincurred.Therefore,thiscostwasestimatedforeachsupplierbymultiplyingthenumberofdefectivepartsfoundafterreceivinginspectionbytheinitialpurchasepriceofthepart.Example

100RejectedPartsx$1.80PurchasedPrice/Part=$180

CostofProcessinginReceivingInspection.Becausethiscompanyhadlaborstandardsinreceivinginspection,thiscostcouldbeestimatedbyusingtheappropriatelaborstandard,theaveragehourlywagesandfringebenefitsofareceivinginspector,andthenumberoflotsprocessedforaparticularsupplier.

Example

Caution:Thismethodofestimatingthecostofadefectiveproductshouldnotbeadoptedbeforeverifyingbyaspecialstudythatitisreasonableunderyourspecificcircumstances.

Obviously,thisisagoodidea,iftheobjectivescanbeachieved.

ROI=Savingsx100Investment

81 UseofQualityCosts

COSTOFQUALITYINSMALLBUSINESS

TheCompaniesStudiedFourcompanieswereinterviewedtogatherinformationregardingthecostofqualityinsmallbusinesses.Thecompaniesincludetwomanufacturingconcernsandtwofromtheservicesector.

Thefirstofthemanufacturingcompaniesmakesplasticpackagingforuseinthefoodindustry.Plasticfilmonrollsisbondedtogethertoformbags,andthesegothrougharollingprocessinwhichthecustomer'slogoisprintedontheoutsideofthebag.Theproductisthencuttothespeci­fiedsize.Thecompanyemploysfrom100to249peopleandhasannualsalesofbetween$20and$50million.

Thesecondmanufacturingcompanymakeselectricalsurgeprotectors.Thecasingsfortheprotectorsarepurchasedfromoutsidesources,andthecompanymakesandassemblestheinnercomponents.Thefirmemploysfrom100to200peopleandhasannualsalesbetween$2and$8million.

Thefirstoftheserviceindustriesprovidescomputerprogrammingservicesandprepackagedsoftware.Thiscompanyisinvolvedwithcom­putersoftwareanalysisandthedesignanddevelopmentofdatabasedeci­sionsystemsoftware.Itemploys90to110peopleandhasannualsalesofapproximately,$14million.

Thelastcompanyinterviewedisamanagedhealth-careservicescom­pany.Thefirmactsasanintermediarybetweeninsurancecompaniesandtheinsured.Itemploysapproximately500people,anditsannualrevenuesarebetween$25and$50million.

ResultsoftheStudyAsummaryoftheresearchresultsispresentedinTable4.1.Foreachofthefourcategoriesofthecostofquality(prevention,appraisal,internalfailure,andexternalfailure),thetablespecifiestheelementsofcostwhichthecompaniesreportedasapplicable(indicatedbyanX).Inaddition,the"Yes/No"notationreferstothecapturingofdata:"Yes"meansthatthefirmcurrentlyrecordsthedata;"No"meansthatthedataisnotcurrentlybeingrecordedbutcouldbe.

Thissectiondiscussesqualitycostsinthesmallbusinesssector.Itwillpresenttheresultsofr~searchatfoursmallfirmsandwillproviderecommendationsonmakingacostofqualitystudyinasmallmanufacturingorservicefirmI

ChapterFour 80

'ROI-$6000x100_40001-$1500-70

Savingswouldbethereductioninsupplierqualitycostsanticipatedthroughthisapproach.Intime,thepurchasedcostprobablywouldbereducedaswell.Theinvestmentfordoingthiswouldbethewages,fringes,andtravelexpensesoftheproblemsolver.Forthissituation,apotentialreduction.of$6000inqualitycostswasestimatedforaninvestmentof$1500toprovideheIptosupplierE.Thereturnoninvest­mentwas

AReturnonInvestmentAnalysisUsingSupplierQualityCostsThepreviouslydiscussedfirmalsodevelopedareturnoninvestmentandanalysisstrategyusingsupplierqualitycosts.SupplierEhadaqualityper-

Jormanceindex(QCPI)of1.917.Thiswasinterpretedtorequireimmedi­atecorrectiveactiononthepartofthebuyercompany.

FirstthoughtsofthecompanycenteredoncancelingthecontractwithsupplierEandtransferringthetoolstoeithersupplierA,B,orC,allofwhichhadmuchbetterqualityperformanceindices.AcloserlookatthesituationrevealedthatsupplierA,B,orCmaynotdomuchbetterinitially,sincethiswasanewgenericproductthatwasundergoingsignificantstart­upexpenses.AtriptosupplierErevealedthat,althoughthecompanydidnothaveastaffofproblemsolvers,itsqualitysystemandmanufacturingequipmentwereadequate.

ThebuyerthenconsideredtheideaofsendingaproblemsolverinitscompanytosupplierEfortwoweekstoexpeditethereductionofstart-updifficulties.Inmakingthisdecision,thereturnoninvestment(RO!)con­ceptwasused:

qualitycosts.Oncethesearerecognized,plannedstepscanbedevel­opedformeasuring,comparing,andanalyzingsothatimprovementcanbemade.

82

UseofQualityCosts83

InternalFailureCosts.Inallofthecompaniesinterviewed,theelementofreworkisanapplicablecostofquality,andinallcaseseachcompanyiscurrentlycapturingthisfigurefrombasicdatanowrecorded.Scrapappliestothreeofthefourcompanies;however,oneoftheservicecom­paniesisahybrid,andscrapistrackedinthemanufacturingareaofthecompany.Itappearsthatscrapmaynotapplyintheserviceindustries.Allofthecompaniesanswered"Yes"totheareaoffailureanalysis,butnoneofthemiscurrentlycapturingtheamountspentinthisarea(eachindi­catedthatthisamountcouldbedeterminedbyusingtimeestimatesfromtimecardsandthenconvertingthetimedatatodollars).Nopatternwasobservedacrossfirmswithrespecttothesupplierareaor100percentsorting(twoofthecompaniesindicatedthatthisapplies,twoindicatedthatitdoesnot).Themanufacturingcompaniesindicatedthattheydolowerpricesbecauseofaproductdowngradeandareabletocapturethisamount;thisareadoesnotapplytotheservicefirms.

ExternalFailureCosts.Onearea,ComplaintAdjustment,appliestoallcompanies.Noneofthefirmsiscurrentlycapturingthecostsinthisarea,buteachcompanyindicatedthatthesechargescouldbecaptured.Themethodsforestimatingthecostsvary,butallofthemethodsarebasedonsomemethodofdeterminingorcollectingtheactualhoursspentontheadjustmentofcomplaints.Also,sincethecompaniesaresmall,mostofthecomplaintsarehandledbymiddleorupper-levelmanagement.Theseindividualsindicatedthattheirtimecouldbedeterminedthroughbetterrecordsofthe'timeandmoneyspentinthisarea.

AnotherelementthatappliestoallcompaniesisAllowances.Eachcompanyindicatedthatconcessionsaremadetocustomerswhentheyacceptsubstandardproducts.ThemanUfacturingcompaniesarecapturingthesecostsusingdatathatarecurrentlybeingrecorded.Theservicecom­panies,however,arenotcurrentlycapturingthesecosts.Bothservicecompaniesindicatedthatthesecostscouldbedeterminedusingcurrentdata(eitherpenaltieschargedbythecustomerortheamountoffees

waivedbecauseoftheproblemencountered).

AppraisalCosts.Incoming,In-process,andFinalInspectionandTesting;andProductQualityauditsapplytoallofthecompaniessurveyed.How­ever,noneofthecompaniesiscurrentlycapturingthesecosts.Allcompa­niesindicatedthatthesecostscouldbedeterminediftheirlaborreportingweremorespecific--,-thatis,iftimecardswereusedforeachindividual

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Thislossisdifficulttomeasure,although,ifsufficientmarketresearchinformationisavailable,itcansometimesbeusedwithotherinfonnationtoestimatethelossofsalesrevenueduetopoorquality.2Inanyevent,theimpactofqualityonsalesrevenueshouldbeconside~ed,at~eastb~identi­fyingtheareasofcustomerdissatisfactionandbytakmgactlOntoImprovetheretentionofcurrentcustomersandtocreatenewcustomers.

RecommendationsforMakinganInitialCostofQualityStudyOneapproachfollowsthesesteps:

1.Inmonetaryterms,introducemanagementtowhateverdataareavailable.Theeffectwillbetoindicatehowbigtheproblempotentiallyisintermsthatwillgettheirattention.

2.Proposethatacommitteebeformedtogaugethecostofquality.Ideally,someonefrommanagementshouldchairthiscommittee,anditshouldincludeadditionalpersonnelfrommajorlinefunctions.

3.Adapttheelementscomprisingthecostsofqualitytofitthefirm.Thislistcanbepreparedbyaqualitymanagerorafinancemanager,withinputfromaccountingandotherfunctions.

4.Haveupper-levelmanagementaffirmthedefinitionsandassigndutiesbasedonthesedefinitions,includinganagendafordatacollection.

5.Collect,summarize,andanalyzethedata.Theanalysisshouldidentifythe"vitalfew"failurecosts.Specificimprovementprojectsshouldthenbeproposedtodetennineandremovetherootcauses.

6.Selectoneimprovementprojectandpursueitusingmodemproblem-solvingtoolsofqualityimprovement?Thisfirstprojectshouldbecarefullyselectedtolearnanddemonstratetheeffectivenessoftheproblem-solvingtools.

7.Reviewthefullstudyandselectadditionalimprovementprojectstopursue.

ThisapproachprovidesanoppOliunityforuppermanagementtoden:on­strateleadershiponquality,anditalsoassurestheinvolvementoffunctlOnssothatthestudyreceivespriorityandtheresultsarerecognizedascredible.

85 UseofQualityCostsChapterFour

PreventionCosts.TheareasthatapplytoallofthecompaniesareQual­ityplanning,NewProductsreview,andQualityaudit.Allcompaniesindi­catedthatthesecostsarenotcurrentlybeingcapturedbutcouldbe.Onceagain,theoverridingfactorseemstobethatthemoreefficientuseoftimecardswouldserveasameansofdeterminingthecostsintheseareas.Nopatternisevidentintheotherareasinthiscategory.

Overview.Twothemesseemtobebasictoallofthecompanies.First,sincethefirmsaresmall,agreatmanyqualityproblemsarehandledbymanagement,oftenwithoutunderstandingtheextracostsincurredthrough­outthehoneycombofthefirm.Eachcompanyindicatedinitsownwaythatthecostsofcorrectingproblemscouldbecapturediftheindividualsinvolvedwouldkeeprecordsofthecostsincurredinsolvingproblemsandpacifyingcustomers.

Theotherissuepervasiveacrosscompaniesisthatthecostsofqualitythatapplybutarenotbeingcapturedcouldbecapturedorestimatedt?roughtheuseofsomemethodoftime-capturingdevice,forexample,t~mecar~sindicatingtheamountoftimespentonspecificareasofinspec­tIon,testmg,etc.Also,sincethecompaniesaresmall,managementisabletotalkoutproblemswithoneanother.Thetimespentsolvingproblemsisa:lsoacostofquality.Thiscostcouldalsobeestimatedfrommeetingmin­utes,betterrecordkeepingbytheindividualsinvolved,andsoon.

actionperformedbyemployees.Thisisapervasivethemethroughoutthisanalysis;theuseofmoredefinitivelaborreportingwouldallowmostofthecostsofqualitytobecapturedanddollarized.NoneoftheotherareasofAppraisalappliestoallofthecompaniesinterviewed;noristhereanypattern,suchas"Yes"formanufacturingand"No"forservice.

TheImpactofQualityonSalesRevenue

Traditionally,themeasurementofthecostofqualityhasfocusedonthecos.tsofnonconfonnances-thatis,defectsQr-errorsinthegoodsorservicesdelIveredtoexternalorinternalcustomers-(externalandinternalfailurecosts).AnimportantcostthatisnotusuallymeasuredislostsalesduetopoorqU~lity.Thisisreferredtoasahiddencost(seediscussiononpage7),becauseIthasnotbeenmeasured.Theselostsalesareduetocustomerdis­satisfa~tionwiththegoodsorservicespro~i.ded.ThisdissatisfactionmayresultIIIalossofcurrentcustomers-"customerdefections"-andaninabilitytoattractnewcustomersbecauseofatarnishedqualityreputation.

I~de?ningthecostsofquality,thefollowinaguidelinesshouldkeptIIImllld:b

1.CustomizethedefinitionforyourOwnorganizatI'onThe....l.'1d'.1aIure,

appIaI~a,anpreventIOncategoriespresentedherehaveprovenusefuII~practice.Asapossiblestartingpoint,usethatframeworkalongwI~htheeleme~tsreportedinTable4.1foramanufacturin~oraserVIcefirm.RevIewAppendixBforadditionalelementsthatmayap?lytoyouror~anization.Createadraftofthedefinitionsofcat~g.on~sandshowIttovariOl:sfunctions,askingtheirinputona~dltlOnalele:nentsorchangesIIIwording.Whatresultsfromallt?ISarethe"nght"de?nitionsforyourfirm.Whetherthesedefini­tIonsconformtothelIteratureisnotcritical.

2.Obtainagreementoftheexecutivemanagementteamontheele­~entsofcosttoobeincludedbeforeanydataarecollected.Some­tImes,summanzeddataononeortwokeyelementssuchasscrapandrework,cangainmanagement'sattentionand'stimulatetheneedforafullstudy.Theaccountantcouldbeaskedtoreviewthispaperandotherliteraturetoprepareadraftofdefinitionsofele­ments.T?eexecutiveteamcouldthenreviewanddiscussthedraftandfinalIzethedefinitions.

3.Don'tlimitth~definitionstoonlycoststhatdirectlyinvolvethegoods~rservicessol~tocustomers,suchasscrap,rework,and~omplalllts.PoorqualItyisnowviewedasapplyingtoanyactivityIIIthecom~any.Anyworkthatmustbediscardedorreprocesseds.hou!db~v~ewedasafailurecostofquality.Thus,wheninforma­tI~n:s~ISSlllgf~omadocument,thetimespentinretrievingthemIsslllgmformatlOncontributestothecostofquality.

4.l?on't~cceptasinevitablecertaincamouflagedcoststhatarerou­tlllely.mcurredbutarereallypartofthecostofquality.Inmanu­factunng,someexamplesarecostsofd.. '"reeSlgmngaproductbecauseItfallstomeetcustomerneedsorcostsofchanainaprocesses~ecausetheyareunabletomeetproductspecificati~n;IntheserVIcesector,watchforactivitiesthataredescribedwithsuc~wordsasrework,check,expedite,correct,adjustmentandshnnkage.'

Focusontheinternalandexternalfailurecostcategories,becausetheseprovidethemajoropportunityfortheremovalofcausesofcustomerdis­satisfactionandreductionincostsofquality.Thesecostsshouldbeattackedfirst-"that'swherethemoneyis."Determiningtherootcausesandremovingthemwillrequiresomelevelofdiagnosis,buttheinvest­mentoftimeandresourcesindiagnosiscanachieveabenefit-to-costratioofbetween5to1and10to1.

Appraisalcostsarealsoanareaforpotentialreduction,butnotuntilthecausesofthefailurecostshavebeenidentifiedandremoved,therebyreducingtheneedforappraisal.

Intheinitialstudy,costdataarecollectedfromdifferentsources:

1.Establishedaccounts.Examplesarescraporreworkaccountsthatquantifythecostsincurredintheseareas,andpricereductionsduetoproductdowngrades.

2.Analysisofingredientsofestablishedaccounts.Checktomakesurethatonlythecostsofqualityareincludedintheanalysis.Forexam­ple,customerreturnswillprobablyincludereturnsforreasonsotherthanproductdefects.Theseshouldnotbequantifiedintheanalysis.itmaybenecessarytoviewthesourcedocumentstodeterminethereasonforthereturn.

3.Basicaccountingdocuments.'Forexample,inspectioncostsincurredintheoperationsareacouldbequantifiedbyobtainingthenamesandassociatedpayrolldataoftheemployeesresponsible.

4.Estimates.Severalapproachesmaybeneeded:

a.Temporaryrecords.Forexample,someproductionworkersspendpartoftheirtimerepairingdefectiveproduct.Timekeepingdevicescouldbeusedtoestablishtemporaryrecordstocapturecostsincurredtorepairdefectiveproducts.Thesecouldhelptoestimatetotalrepaircosts.

b.Worksampling.Thisrandomsamplingapproachdeterminesthepercentageoftimespentineachofanumberofpredefinedtasks.Thispercentagecouldthenleadtoanestimateofthecostsincurredintheseareas.

c.Allocationoftotalresources.Forexample,intheshippingdepartment,partoftheemployee'stimeisspentoninspecting

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87 UseofQualityCostsChapterFour 86

ReportingtheCostofQualityReportingthecostofqualitycantakethreeforms:

1.Specialreportstosupportactivitiesonqualityimprovementprojects

2.PeriodicreportstosummarizeCurrentstatusonselectedelementsofthecostofquality

3.Comprehensivereportssimilartotheinitialstudydescribedearlier

Asstructuredqualityimprovementteamsusingtheproject-by-projectapproachhaveemergedasastrongforce,reportingonthecostofqualityhasfocusedonsupportingactivitiesforqualityimprovementprojects.The~ereport~shouldincludeinformationtohelpdiagnosetheproblem,~n?mformatIOntotrackthechangeincostsasaproblem-solvingremedyISImplemented.Whatdataisneededisdeterminedbytheteam,andtheteamoftencollectsitsowndata.

Althoughsomecompanieshaveusedaqualitycostscoreboardto~eriodicallygivethes~atusofkeyelementsofthecostofquality,thetrendISforthecostofquahtyandotherquality-relatedinformationtobecomeint~gr~tedintotheoverallperformancereportingsystemoforganizations.Ah~I1ltednumberofmeasureswouldbereported,includingthecostofquahtyand~nyinformationontheimpactofqualityonsalesrevenue.

~eri.odi~ally-say,annually-acomprehensivereportonthecostofqualItyISusefultosummarizeandconsolidatetheeffortsandresultsofprojectteamsandotherqualityimprovementactivities.Suchareportshould

1.Reflecttheresultsofimprovementefforts

2.Provideguidancetoidentifymajorareasforfutureimprovementefforts.

SOFTWAREQUALITYCOSTS

89 Usea/QualityCosts

Additionally,thereportshouldbeexpressedintermsthataremean­ingfultomanagement.Thecostofqualitycanberelatedtoseveralothermeasures.Todeterminewhatmeasuresmightbeused,seethesectiononQualityCostBasesinChapter2.

Thecomparativebaseusedwilldeterminetheeffectthattheresultsofthestudywillhaveontheattitudeofmanagement.Forinstance,theexec­utivesinterviewedinthefourfirmsdiscussedearlierthoughtthatcostsasapercentageofsalesrevenue,asapercentageofprofit,andasdollarsperunitofproductproduced,weremeaningfulmeasures.

ConclusionsSeveralpromisingconclusionsemergefromthisresearch.

First,smallfirmscanestimatethecostofqualityeasierthanlargefirms.Thesmallernumberofpersonnelandfewerlinesofcommunicationinsmallfirmsmakeiteasiertotraceanddeterminethecostsofeventsthatleadtopoorquality.

Second,analyzingthecomponentsofthecostofqualityspotlightswheremostofthislossexistsand,thus,definestheareaswhereimprove­menteffortsshouldbefocusedtoimprovequalityandreducetheextracostsofpoorquality.

Finally,addressingthemajorcontributorstothecostofqualitybyfindingandeliminatingtherootcausesfurnishesagoldenopportunityforafirmtoprovidecustomerswithbettervalue.Thesedays,allfirmsclaimtohaveproductswiththe"bestvalue"butthisclaimcanbemadetangi­blebyusingthesavingsincostofquality(achievedbyaqualityimprove­menteffort)to:

1.Financeadditionalproductfeatureswithoutraisingprices,or

2.Lowerpricesforproductswithexistingfeatures.Eitherroutetoincreasedvaluewill,ofcourse,leadtohighersalesincomeforthefirm.

Formanyfirms,estimatingthecostofqualitycanbethecatalysttofuelaction-orientedstepstoachievequalityimprovement.

Softwareisthecomputerprograms,associatedprocedures,documenta­tion,anddatapertainingtotheoperationofacomputersystem.Asa

ChapterFour

beforepackagingtheproduct.Theremaybe,however,noprovisionforcapturingthiscost.Toquantifythistimeandcost,askeachemployeetoestimatetimespentoninspectionwhilepackagingtheproduct.

d.Unitcostdata.Determinethecostofcorrectingasingleerror.Thiscostcanthenbemultipliedbytheestimatednumberoferrorsofthesametypethatareexpectedperyear.Examplesincludebillingerrorsandscrap.

88

90Chapterrour

purelyintellectualproductitisamanathemostlabo.t'I :.br-IllenSIve,compex,anderror-pronetechnolo~lesmhumanhistory.Differentiatedfromcom­puterhardware,thephysIcalmachinesonwhichsoftwareworks,manytype~ofso~twareprod~ctsandsystemsexisttoday.Theseareoftenchar­actellzed~Ither.bybusInessdomains,(forexample,informationsystems)or~yrelatlO~shiPtoothersoftwarelayeredbetweentheuserandthecom­puu.ngm~chmery,.(suchasprogramsembeddedinmicroprocessorstocre­ateIntellIgentdevIcesandappliances).

TheDevelopmentandEconomicsofSoftwareTohighlightsoftware'sdistinctivecharacteristics,itishelpfultocontrastthedevelopmentofsoftwarewiththatofmanufacturedproducts:

•Softwareisa~intel!ectual,ratherthanaphysical,product,soitsdevelopm~ntISsubjecttohumanandlogicalconstraints,ratherthanphysIcallaws.

•One.cannota~sumethatasoftwarespecificationisstable.ChangingreqUlrementsISexpectedbehaviorinsoftwaredevelopment.

•Productivitylevelsvarywidely(moresoinindividualsthaninteams).

•Pr?ductdefectsare.resultsofhumanmisunderstandingsandmIstakes,notdeficIentmaterials.

•Manufacturedgoodsarevaluedfortheirfeatures,butsoftwareisalsovaluedforitsinteractivefunctionality.

•Theeconomicsofsoftwarequalityhingesontheprocessofunderstandingrequirements.

•Thisprocessofunderstandingrequirements,moresothanconformance,iscommonlyresponsibleforthevalueofasoftwareproduct.

•!h~c~stsofthemanufacturingphaseofsoftwareproductionarelllsl~m~cant.ThebulkofsoftwaredevelopmentcostsareinthedesIgn,Implementation,andtestingdisciplines.

•Statisticscannotbeappliedtoreplications,becausesoftwareproductsareusuallyoneofakind.

•Thecostofownershipisaccounteddifferently,becausesoftwareassetsarenotcapitalizedanddepreciated.

UseofQualityCosts91

WhatIsSoftwareQuality?Althoughthereisnosinglecomprehensivestandarddefinitionofsoftwarequality,descriptionsandtermsarefoundinsourcessuchasISO9000-3,IEEESoftwareEngineeringStandards,andvariousbooksonthes4bject.Thefol­lowingaredefinitionsofsoftwarequalityfromseveraldistinctperspectives:

•Levelofsatisfaction.Thedegreetowhichacustomeroruserperceivesthatasoftwareproductmeetshisorhercomposite

needsandexpectations

•Productvalue.Thevalueofasoftwareproductrelativetoits

variousstakeholdersandthecompetition

•Keyattributes.Theextenttowhichasoftwareproductpossessesa

desiredcombinationofproperties

•Freedomfromdefects.Thedegreetowhichasoftwareproductworkscorrectlyintargetuserenvironments,freefromoperational

flawsProcessquality.Inrelationtothedevelopmentprocessbywhichtheproductisproduced,itistheextenttowhichpeopledothe

rightthingsinaneffectiveway

Everyapplicationfbusinessdomainfaces&.specificsetofsoftwarequalityissues,andsoftwarequalitymustbedefinedaccordingly.Forexam­ple,lifecriticalapplicationshaveverystringentoperationalneeds,whereastypicalinformationsystemapplicationsmustfocusonmeasuresofcus-

tomersatisfaction.Foreachsoftwaredevelopmentproject,aspecificlevelofsoftware

qualitymustbedefinedduringtheplanningphase.Suchadefinitionbothcontributesthebasisforpracticalmeasuresofqualityprogressanddelin-

eatesreadinessforreleasetocustomers.

WhyIstheCostofSoftwareQuality(CoSQ)ImportantNow?AsshowninFigure4.1,ifimprovingbusinesssuccessthroughsoftwarequalityisacorporategoal,thenweneedanswerstoafewsimpleques­tions,questionsthataretoooftennotaskedintoday'ssoftwaredevelop-

mentsituations.Thesequestionsare:

•Howmuchdoessoftwarequalitycost?

•Whatarethebenefitsofgoodqualitysoftware?

•Howgoodisoursoftwarequality?

ChapterFour

Figure4.1.CostofSoftwareQuality(CoSQ)incontext.

93

Defectmanagement,rework,retesting

Technicalsupport,complaintinvestigation,defectnotification,remedialupgradesandfixes

Testingandassociatedactivities,productqualityaudits

SQAadministration,inspections,processstudiesandimprove­ments,metricscollectionandanalysis

UseofQualityCosts

CategoryDefinitionTypicalCostsforSoftware

quality,verylimiteddatahasbeenavailableintheopenliteraturefordis­cussingthecostofsoftwarequality(CoSQ).Knox'smodel

4andthe

Raytheonstudies5

.6

arenotableexceptionsinthattheyexplicitlyusethecostofqualitymodel.

DuetothelimitedamountofdataavailableonCoSQ,KnoxusedtheemergingCoQmodeldevelopedinmanufacturingenvironments,extend­ingitacrosstheSoftwareEngineeringInstitute'sCapabilityMaturityModel(SEICMMrtoproduceatheoreticalCoSQmodel(seeFigure4.2).TheSEICMMspecifiesrequirementsforsoftwareorganizationsaccord­ingtofivelevelsofprocessmaturity(seeTable4.3).

StartingwiththetotalCoSQ(TCoSQ)at60percentofdevelopmentcosts(basedontwoindustryfigures)forCMMLevelIorganizations,KnoxusedmanufacturingexperiencetohypothesizethatCMMLevel5organizationscancutthisCoSQbyabout67percent.HethenrationalizedthefourcomponentcostsateachCMMlevel.Hismodelsuggeststhat,forLevel3organizations,CoSQisabouthalfofdevelopmentcosts.

ThesameyearthatKnox'spaperappeared,Dion5usedtheCoQmodelasonemeansofinterpretingtheresultsofqualityinitiativesunder­takenatRaytheon'sElectronicSystemsGroup(RES).Morerecently,Haley6updatedthisstudy.TheCoSQresultsareshowninFigure4.3.(AppraisalandpreventioncostswereshownseparatelyintheDianpaperbutwerecombinedintheHaleypaper.)

InternalfailureNonconformancesdetectedpriortoproductshipment

ExternalfailureNonconformancesdetectedafterproductshipment

AppraisalDiscoveringthecondi-tionoftheproduct

PreventionEffortstopreventpoorproductquality

Table4.2.Typicalcostsofqualityforsoftware.

Problems,Defectiveness Customer

satisfactionMarketshare

CoSQandrelatedratios

Improvebusinesssuccess

-;g~T:q~~-HowmuchWhataretheHowgooddoesSWbenefitsisourSWqualityofqualityquality?

co,\?.~ftw",?1 J-___L_ rProfit

Reputation

Business90al#7

Questions

Measures

Oncetheanswerstothesequestionsareknown:

•Thecostscanthenbecomparedtooverallsoftwareproductioncostsandsoftwareproductsales.

•Thecostscanbecomparedtobenchmarksandnorms.

•Deeperanalysiscanleadtoactionstakentoimprovethecompetitivesituation.

•Thebottom-lineeffectofimprovementactionscanbemeasured.

•T~~economictrade-offsinvolvedwithsoftwarequalitybecomevIsIble,thusleadingtobetterdecisionmaking.

TheApplicationCostofQualityPrinciplestoSoftwareTable4.2liststhefourCostofQuality(CoQ)categorieswithtypicalcostsofsoftware;.gl!ality.Mostpreventioncostsareinthedevelopmentcycle,exceptfororganizationwidecosts,suchasprocessdefinitionandmetricscollectionanaanalysis.

CostofSoftwareQuality

WhilethecostsofsoftwarequalityassuranceandprocessimprovementhavebeenatopicofconcernformorethantwentyyearsandtheCostofQualitycategorieshaveoftenbeenusedbroadlyindiSc;ussionsofsoftware

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Processandproductqualityaremanagedusingdetailedmeasures.

Processesaredocumented,standardized,andintegratedintotheorganization.

Continuousprocessimprovementisenabledbyquantitativeprocessfeedback.

Softwareprocessesareundefinedanddependonindividualefforts.

SQAandbasicprojectandconfigurationmanagementenablerepeatability.

-0-Prevention"'Appraisal-D-Internalfailure......Externalfailure--It-TCoSQ

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94ChapterFour

SEICMMLevel

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Table4.3.LevelsintheSoftwareEngineeringInstitute'scapabilitymaturitymodel.

Figure4.2.Knox'stheoreticalmodelforcostofsoftwarequality.

StartingatCMMLevelI,RESintroducedasoftwareprocessimprove­mentprograminAugust1988.Usingtheresultsoftrackingfifteenpro­jects,theyachievedCMMLevel3practicesinalittleoverthreeyears.TheirresultsagreewellwithKnox'smodel;intheLevelIstage,RES'stotalCoSQfluctuatedbetween55percentand67percentoftotalprojectcosts,and,bythetimeofreachingLevel3processmaturity,theirtotalCoSQhaddroppedtoapproximately40percent.By1996,thisorganiza­tion'stotalCoSQwasapproximatelyISpercentoftotalprojectcostsandthereworkduetobothinternalandexternalnonconformanceshadbeenreducedtolessthan5percent.(ForamoreextensivediscussionofCoSQatRES,seetheCoSQcasestudy,page169.)

AthirdsourceofCoSQdataisaPriceWaterhousestudythatana­lyzedthecostsandbenefitsofsoftwarequalitystandardsfromasurveyofnineteenUnitedKingdom(UK)softwaresuppliers.sThestudyesti­matedthecostofconformance(preventionandappraisalcosts)tobe23percentto34percentofdevelopmenteffort.Thestudyalsoestimatednonconformance(failure)costsat15percentofdevelopmenteffortforatotalCoSQof38percentto49percentofdevelopmenteffort.Itmustbenotedthatthisstudyexcludedthecostsofunittestingandreworkbecausethesupplierscouldnotseparatethesecosts.Withincreasesintheesti­matestoaccountforthisexclusion,CoSQinasoftwareorganizationwithaqualitysystemcanrangefrom40percentto55percentofdevelopmentcosts,withaconformancecoststononconformancecostsratiorangingfrom1.5to2.

AscomparedtotheRESgraph,thesefiguresgenerallyagreewithaperiodlatein1990,whenRESwasapproachingCMMLevel3:RES'sCoSQwasabout45percentofdevelopment,anditsratioofconformancetononconformancecostswasabout1.5(conformance-27/nonconfor­mance-18).Knox'smodelpredictedthataCMMLevel3organizationwould·haveatotalCoSQof50percent,butwithaconformance(3+1t:;:..J4)tononconformance(50-14=36)costratioofapproxi­mately·O.4(14/36).ItappearsthatKnox'smodelisafairpredictorofCoSQ-"formaturingsoftwareorganizationsbutthatactualconformancecostsaremuchhigherandnonconformancecostsmuchlowerthanwhatthemodelpredicts.

Fromthisdata,wecanexpectCoSQ,withthepresentstateofsoft­wareengineeringpractice,torangefrom20percentto70percentofdevelopmentcosts.Evenaccountingforthemarginbetweenproductioncostsandsales,CoSQappearstoberoughlytwicemanufacturingCoQ.

ElementsofaCoSQEffortSeveralpointscanbemadewithregardtomeasuringandusingcostofqualityinformationspecificallyforsoftwareprocessimprovement.Theseareaccountingandgatheringofqualitycostdata,qualitymetricscollec­tion,dataanalysis,andthepresentationoftheresults.

97 UseofQualityCosts

Accounting.Gatheringqualitycostdataassumesthatcostshavebeenaccountedusingtaskandexpenseelementsthatcanbesummedintothefourmajorc~tegoriesofqualitycosts.Manysoftwareorganizationstrackcostsinamanneramenabletoqualitycosting,butmanyothersdonot.Inthelattercase,apreliminarystepofdefiningandinstallingsuchachartofaccountsisrequired.AsampleofsuchachartofqualitycostsisprovidedinTable4.4.Thequalityelementsinasoftwareorganization'schartofaccountsmustbetailoredtoreflectitssoftwareprocess.TorealizethefullbenefitofCoSQ,thechartofaccountsmustalsoallowfortheadditionofprocessimprovementtasks.

Inthebestcases,qualitycostscanbetakendirectlyfromdepartmentalaccountingreports.Inothercases,itmaybenecessarytoresorttobasicaccountingandengineeringrecords,suchasschedules,timereports,defectrepol1s,andpurchasingrecords.Intheworstcases,onemayfallbackoninter­viewswithmembersofthesoftwareorganizationinordertoconstructesti­matesofeachqualitycostelement.Acontrolledscientificstudyisunlikely;incompletedatacansufficeinbeginningasoftwarecostbenefitanalysis.

PotentialBenefitsofUsingCoSQTheworksofKnoxandRESdemonstrateoneofthebenefitsofmeasur­ingandusingCoSQ,thatis,justificationforqualityinitiatives.Examplesofreturnoninvestment(ROI)inqualityimprovementinitiativesspeakmostclearlytomanagersresponsibleformaintainingaprofitableorgani­zation.However,CoSQcanbeusedforanumberofotherbenefits.Itcan:

•Providecostdataformotivationalpurposesbydemonstratingtherelationshipofemployeeeffortstothebottomline

•Provideabasisforbudgetingthequalityoperation

•Compareprocessimprovementsandidentifythemostcost-effectiveones

•Provideameasureofcomparingthesuccessofprojects

•Beusedtoidentifyqualityimprovementcandidates

ChapterFour 96

Sourcesofqualitycostdata:Ordinarily,qualitycostdataforthemajorityofcategorieswouldbeobtainedfromsalaryandexpensereports.Exceptionsareintheexternalfailurecategoryandareshownhereinparentheses.

OneofthepitfallsofaCoSQprogramis"controversialcostele­ments."Usually,thequestionisaboutwhichcostsarenormaloperatingcostsandwhicharequalitycosts.Anexampleisthecostofproducingaprojectmanagementplan.Whilethisplanisproducedforthesakeofman­agingaproject'sexpensesandschedule,italsoinfluencesproductandprocessquality.Itishelpfultokeepinmindthefollowingpoints:

•Argumentsovercontroversialelementshavebeenknowntosabotagecostofqualityprograms.

•Thelargestqualitycostsarethosethataremosteasilydiscerned,suchasreviews,softwarequalityassurance,testing,andrework.

4.ExternalFailureCosts4.1Technicalsupportfor

respondingtodefectcomplaints

4.2Productreturnedduetodefect

4.3Maintenanceandreleaseduetodefects

4.4Defectnotificationcosts4.5Upgradeduetodefect4.6Serviceagreementclaims

(warrantyexpensereports)4.7Litigationcostsandliability

claims(insuranceandlegalreports)

4.8Penalties(productcontractreports)

4.9Coststomaintaincustomer/usergoodwillduetodissatisfaction(salesrepQrts)

4.I0Lostsales/marketshareduetoqualityproblems(fieldsalespersonreports)

UseofQualityCosts99

3.InternalFailureCosts3.1Productdesigndefectcosts

3.I.ICausalanalysisandreporting

3.1.2Designcorrectiveaction3.1.3Reworkandretestdueto

designcorrectiveaction3.1.4Workproductswasted

duetodesignchanges3.2Purchasedproductdefectcost

3.2.1Defectanalysiscost3.2.2Costofobtaining

productfix3.2.3Costofdefectwork­

arounds3.2.4Rework

3.3Implementationdefectcosts3.3.1Defectmeasurementand

reporting3.3.2Defectfixing3.3.3Causalanalysisand

reporting3.34Projectprocess

correctiveaction3.35Fixinspection3.36Re~estandintegration

1.4Configurationmanagementadministration1.4.1Salaries1.4.2Expenses1.4.3Training1.4.4Platformandtools

1.5SQAadministration1.5.1SQAsalaries1.5.2SQAexpenses1.5.3Softwareprocessand

standardsdefinitionandpublication

1.5.4Metrology:datamaintenance,analysis,andreporting

1.5.5SQAprogramplanning1.5.6SQAperformance

reporting1.5.7SQAeducation/trainina1.5.8Processimprovement0

1.5.9SQAprocesscomplianceaudits

2.AppraisalCosts2.1Suppliedproducttesting2.2Projectappraisalcosts

2.2.1Verificationandvalidationactivities

2.2.2Testina:plannina o0'

platforms,setup,testdatageneration,testexecutionandlogging,reporting,testdataevaluation

2.2.3Productqualityaudits2.3Externalappraisals

2.3.1Processmaturityevaluation

2.3.2Fieldperformancetrials2.3.3Specialproduct

evaluations

Table4.4.AsampleCoSQchart.

98ChapterFour

1.PreventionCosts1.1Requirements

1.1.1Marketingresearchforcustomer/userqualityneeds

1.1.2Customer/userqualitysurveys

1.1.3Productqualityriskanalysis

1.1.4Prototypingforcustomerreview

1.1.5Userrequirements/specificationreviews/inspections

1.2Project

1.2.1Projectqualityplanning1.2.2Projectprocessvalidation1.2.3Qualityassessmentof

developmentplatformandtools

1.2.4Platformandtoolsdevelopmentforquality

1.2.5Developerqualitytraining1.2.6Qualitymetricsdata

collection1.2.7Designforquality:

softwarecomponentreuse1.2.8Formalinspections/

peerreviews1.2.9Projectconfiguration

management1.2.10Projectchanaeo

management1.2.11Suppliercapability

assessment1.3Reuselibrary

1.3.1Salaries1.3.2Expenses1.3.3Training1.3.4Platformandtools

100ChapterFour

Therefore,itisoftensafetoexcludecontroversialelementswithoutundulyaffectingthetotalCoSQ.

•ConsistencythroughoutaCoSQprogramismoreimportantthanthoroughinclusionofqualitycosts,becauseconsistencyallowsforclearidentificationofimprovementsaswellascandidatesforimprovement.

Concernsmayalsoariseastohowqualitycostsshouldbecatego­rized.Again,consistencyisimportant.Forexample,inTable4.4,thecostsassociatedwithformalinspections(peerreviews)aretreatedaspreventioncostsratherthanasappraisalcosts.Thisisamatterofinterpretation,dependingonwhenaworkproductisconsideredreadyforappraisal.Althoughmanufacturinginspectionsareconductedonpiecesaftertheyareproduced,insoftwareproduction,inspectionsmaybeincorporatedintheproductionprocessperthepeerreviewskeyprocessareafortheSEICMMLevel3.Fordocumentation,thismeansthatadocumentisnotcom­pleteuntilithasundergoneapeerreviewandhasbeenrevised.Thesameistrueforcode,especiallywhencodeinspectionsprecedeunittesting,clearlyanappraisalactivity.

QualityMetricsCollection.TheCoQhasbeenusedprimarilyinafun­damentalapproachtoquality-thatis,focusingondefectrates(manufac­turing)orserviceproblemreports(serviceindustries)-ratherthanbroaderapproachesthatwouldtakeintoaccountsuchfactorsasusability,testability,andmaintainability.Thefundamentalapproachhastheadvan­tagesofstraightforwardmeasurementandeaseofunderstanding.Italsoallowscomparisonofdissimilarproducts.Mostsoftwareproducerstakeafundamentalapproachtoquality,concentratingondefectmeasurement,prevention,andremoval.

Adefectcollectionsystemforcollectingbothdefectmetricsandthefailureportionofqualitycostswouldprovidedatahavingtheaddedadvantageofaidinginrootcauseanalysisandofidentifyingthem6stcostlydefects(seediscussioninchapter1,pages10and18).Defectmea­surementisagoodplacetostartwithmeasuringCoSQimprovements.Specifically,CoSQcanbeplottedagainstthenumberofproductdefectsatthecompletionofsystemtesting.Thismetricmaybeobtainedfromdefectreportsduringtestingandforaspecifiedtimeperiod,forexamplesixmonths,followingproductrelease.Itcouldalsobegeneratedstatisti­callybasedonpostreleasedefectreportsforpreviousproductsfromthesameorganization.

UseofQualityCosts101

CoSQAnalysisandDynamics.PlottingCoSQagainstaqualitymeasure(e.g.,productdefects)providestheCoSQcurveand,~lottedagainsttime,revealstrendsinanorganization'squalityprocesses.ThISaddressesmostofthegoalsofqualitycosting:justification,motivation,budge.ting,andprocessimprovementcosteffectiveness.However,ParetoanalySIS,b~sedontheprinciplethatqualitycostsarelocalized(80percentofthequahtycos~sareincUlTedby20percentofthequalitynonconfomlances),canbeusedtoIden­tifycandidatesforprocessimprovement(seeChapter5,~age112).WhenCoSQiscategorizedbyproductandprocesssources,typIcallyoneortwosourceswillbeshowntoincurmuchhighercoststhantheothers.

InanalyzingCoSQdata,thedynamicsofthemodelmustbetakenintoaccount.ThefollowingaresomeofthefactorsthataffectCoSQovertime:

•Advancesinsoftwaretechnology-forexample,theprevalenceofgraphicaluserinterfaces-createnewdemandsonsoftwareproducers.

•Growingusersophisticationcreatesdemandsforincreasedfunctionalityandbettersupport(documentation,training,technicalservices).

•Better-applicationsandsystemssetnewstandardsforperformanceandreliability.

•Bettersoftwareproductiontechnology-forexample,intestingandconfigurationmanagement-supportshigherqualitygoals.

Reducedcycletimeandtimetomarketincreasecompetitioninthemarketplaceandmaybeaccompaniedbychangesinactualorperceivedquality.

Thesefactorsmayshiftthepointofdiminishingreturns,usuallytotheright,overtime.Forexample,eitherbettersoftwareproductiontechnol­ogyorgrowingusersophisticationcaneffectashiftintheoptimumCoSQtowardahigherlevelofquality.

CoSQPresentation.Relationshipsthathavethegreatestimpactonman­agementare:

•Qualitycostsasapercentofsales

•Qualitycostscomparedtoprofit

Qualitycostscomparedtothemagnitudeofthecurrentproblem

102ChapterFour

Inad~itiontot?ese,ShowingCoSQasapercentoftotaldevelopmentcostsISappropn~tetosoft.ware.forseveralreasons.First,salesandprofitn:aynothaveadl.r~ctr~latlOnshlptotheactualcostofasoftwareproduct,SIncesoftwarepncmgISoftendictatedbymarketforces.Second,allbutasmallpercentageofsoftwaredevelopmentcostscanbemeasuredinlab.orhours,sothecostscanbereadilyshownineitherhoursordoIlarsThIr?,thestateoftheartinsoftwaredevelopmentissuchthatcomparin~qua!Jt~coststodevelopmentcostsillustratesthemagnitudeofthecurren~chaIlenge.

Conclusions

CoQisapr~ve~techniqueinmanufacturingandserviceindustries,both~or~~n:~umcatmgthevalueofqualityinitiativesandforidentifyingqual­~tymItlatIve~andidates.CoSQoffersthesamepromiseforthesoftware~ndustry,butIthasseenlittleusetodate.InitialusesofCoSQindicatethatItrep~:sentsavery!ar~epercentageofdevelopmentcosts-60percent~ndhIbherfororgaOlzatlOnsthatareunawareofimprovementopportuni­ties.CoSQusecan,however,demonstratesignificantcostsavinas-suchas.~aytheon'sfourfoldreductioninrework-forsoftwareorga~izationswIIlm~toundertakequalityimprovementinitiatives.Perhapswhatismor~Important,theuseofCoSQenablesanunderstandingoftheeco­?omlc.trade-offsthataccompanyactivitiesandexpendituresmadeforImprovmgthequalityofdeliveredsoftware.

Chapter5

QualityImprovementandQualityCostReduction

Thischapterisintendedtoprovideguidancetocompanymanagementandtoprofessionalsengagedinqualityprogrammanagementtoenablethemtostructureandmanageprogramsforqualitycostreduction.Itdescribestechniquesforusingqualitycostsinprogramstoreducecostsand,thereby,improveprofits.AlthoughmostoftheexamplesanddiscussionstofoUowrelatetomanufacturingindustries,thetechniquesandmethodsdescribedarejustasapplicabletothevariousserviceindustriesandmaybeusedbymanagementinbanking,insurance,healthcare,retail,etc.

Inreadingthischapter,itmustbeunderstoodthatimprovingqualityresultsinlowertotalqualitycosts.Totalqualitycostsincludeelementsincurredinmctrketing,design,purchasing,manufacturing,andservice.Inshort,everypartoftheproductcycletypicallygeneratessomequalitycosts,andprogramsforidentifyingandimprovingcostmustbecompre­hensiveenoughtoinvolveallthesefunctions.

THEQUALITYCOSTIMPROVEMENTPHILOSOPHYItisafact,toooftenunrecognized,thateverydoIIarsavedinthetotalcostofqualityisdirectlytranslatableintoadoUarofpretaxearnings.Itisalsoafactthatqualityimprovementsandqualitycostreductionscannotbeleg­islatedbymanagementdemand-theymustbeearnedthroughtheprocessofproblemsolving.Thefirststepintheprocessistheidentificationofproblems;aprobleminthiscontextisdefinedasanareaofhighqualitycosts.Everyproblemidentifiedbyqualitycostsisanopportunityforprofitimprovement.

103

Figure5.1.Qualitycostsystem.

overallstrategicprogramandthequalityprogram.(Foradiscussiononqualitycostsandthestrategicbusinessplan,seepage73.)

Defectivepurchasedmaterialerrors

Purchasing

Netincome

Ultimateimpactofcostofqualitysystemishere'

Warrantyerrors

Marketing QualityAssurance

Profitcenterqualitycosts

TestInspectionCalibrationPrevention

Retestandreinspect

CostofsalesPreventionAppraisal

Failure

Profitandlossstatement

Totalcostofquality

Neededtoconvertqualitysystemactivitiesintothelanguageofmanagementandalsoan"after-the-fact"measureofsuccess.

QualityImprovementandQualityCostReduction105

Engineering

ScrapRework

EngineeringchangesWarranty

QualitymeasuresPerformanceanalysis

CorrectiveactionPreventionactivities

ProcedurecontrolIn-processcontrol

Finalproductcontrol

Manufacturing

ScrapRework

DowntimeTroubleshooting

PROGRAMMINGIMPROVEMENTThestrategicqualityplandescribesamanagementcommitmenttoqualityandqualitycostimprovement.Thequalitycostdataindicateareasthata:ecandidatesforimprovement.Whenthehighestcostareasareanalyzed111

greaterdetail,manyimprovementprojectsbecomeapparent.Forexample,

Figure5.2.Profitcenterqualitycosts.

Thesearetheday-to-dayqualitysystemactivitiesthat"makeithappen."

QUALITYCOSTSANDTHEPROFITCENTER

Thischapterdiscussesaqualityprogramthatisnotconfinedtothecontrolofqualityinmanufacturing.Mostpeoplerecognizethatqualityisdeterminedbymanyfactorsoutsideofmanufacturing,butmanyqualityprogramsdonotconcernthemselveswiththesefactors.Insomecases,qualityprogrameffortshavebeenattemptsatnotallowingthingstogetanyworse(control)insteadofstrivingtomakethingsbetter(improvement).Asaresult,thingshavedeterioratedinmanyplaces,simplybecausecontrolsarenot,andnevercanbe,100percenteffective.Improvingqualityissim­ilartoimprovingproductcosts.Itiseverybody'sjobandeverybodyisfortheidea,but,untilthereismanagementcommitmenttoimproveandafor­malprogramforforcingimprovement,itjustdoesn'thappen.

Thischapterdescribeswhateachcompanyfunctionmustdotoimprovequality,throughtheinvolvementofpeopleinmarketing,design,purchasing,accounting,manufacturing,andqualityassurance.Itdescribeswaystofindproblemsandcorrecttheircauses.Ittellsyouhowtousethecostsassoci­atedwithqualityandhowtoreducethesecosts.

Qualityimprovementresultsincostimprovement.Designingandbuildingaproductrightthefirsttimealwayscostsless.Solvingproblemsbyfindingtheircausesandeliminatingthemresultsinmeasurablesavings.Tocashinon·thesesavings,thequalityperformancemustbeimproved.Thischapterdescribeswaystodothat.

Figure5.1illustrateshowqualitycostanalysisbridgesthegapbetweentheelementsofaprevention-orientedqualityprogramandthemeansusedbycompanymanagementtomeasureperformance-theprofitandlossstatement.Thechartshowstheflowofqualitycostinformationfromtheworkingqualityassuranceleveltothetotalcostofqualitylevel,andultimatelytotheprofitandlossstatement.Everydollarsavedbecauseofimprovedqualityhasadirectimpactonprofit.

Qualitycostsforaprofitcenterconsistofcostsincurredinseveralactivi­ties.Figure5.2showsthebuildupofcostsfromallfunctionaldepartmentsintoanoverallqualitycostanalysisfortheentireprofitcenter.

Ascanbeseen,qualitycostsareincurredbyallmajorfunctionsinanorganization,soproblemareascanexistanywhere.Carefulanalysismustbedonetofindthemostcostlyproblems,andprogramsmustbedevel­opedtoattackthem.Manytimes,astrategicprogramisnecessary.Whenthisneedexists,astrategicqualityprogramshouldbedeveloped,usinginputfromallfunctions,anditshouldbecomeapartoftheptofitcenter'soverallstrategicprogram.Figure5.3showstherelationshipbetweenthe

Insummary,toeffectivelyestablishqualityimprovementefforts,itis

necessaryto•Recognizeandorganizequality-relatedcoststogainknowledgeof

magnitude,contributingelements,andtrends

•Analyzequalityperformance,identifymajorproblemareas,andmeasureproductlineand/ormanufacturingsectionperformance

•Implementeffectivecorrectiveactionandcostimprovementprograms

•Evaluatetheeffectofactiontoassureintendedresults

•Programactivitiesformaximumdollarpayoffandmaximum

effectivemanpowerutilization

•Budgetqualityworktomeetobjectives

QualityImprovementandQualityCostReduction107

Whenqualitycostsaredisplayedtomanagerswhohavenotbeenexposedtotheconcept,theinitialquestionislikelytobe"Howmuchshouldtheybe?"or"Howdoesthiscomparewithotherorganizationsorproducts?".Unfortunately,itisnotpracticaltoestablishanymeaningfulabsolutestan­dardsforsuchcostcomparisons.Aqualitycostsystemshouldbetailoredtoaparticularcompany'sneeds.ThisisnecessarytoperceivesignifIcanttrendsandfurnishobjectiveevidenceformanagementdecisionsastowhereassuranceeffortsshouldbeplacedforoptimumreturn.Whilethesearchforindustryguidelinesorotherstandardsofcomparisonisnatural(infact,benchmarkingencouragesthis),itisquitedangerous,sinceitleadstoqual­itycostemphasisof"scorecarding"ratherthanusea~amanagementtool

forimprovingthestatusquo..'ThefutilityofestablishingmeaningfulabsolutequalItycostgUIde-

linesismoreapparentifyouconsider

1.Inherentkeyvariationsinhowcompaniesinterpretandcapture

qualitycostdata2.Criticaldifferencesinproductcomplexity,processmethodsand

stability,productionvolume,marketcharacteristics,managementneedsandobjectives,customerreactions,andsoon

3.Theawkwardnessorinappropriatenessformanycompaniesofthemostprevalentformofqualitycostmeasure(percentofnet.salesbilled),consideringtheeffectoftimedifferencesbetweentImeofsalesbillingandtheincurrenceofactualqualitycosts

FINDINGTHEPROBLEMAREAS

Marketingstrategic

plan

Manufacturingstrategic

plan

Strategicquality

assuranceplan

Profitcenter'soverallstrategicbusiness

plan

Engineeringstrategic

plan

Financialplan

IIIIIIIIIII1......--0I

L.....J

IIIIIIIII

III I'-.JII L~

Figure5.3.Profitcenter'soverallstrategicbusinessplan.

106ChapterFive

high.w~anty.co~tsare.atriggertorankcustomerfailureproblemsfordetailedInv~stlgatl?n,wItht~eaimofinvestigatingproductdesign,processcontrol,ormspectlonplannmgforsolutionstothehighestcostproblems~ega~dl~ss?fwhatthehighqualitycostelementmaybe,themereactofIdentIfymgItshouldleadtoactionstoreduceit.

Itisofmajorimportanceformanagementtounderstandthattherearenogeneralsolutionstoqualityproblems-thatis,highqualitycostareas.T:eseproblem.sarenotsolvedbyorganizationalmanipulations,newman­abe~ent.techm~ues,.orevenqualitycostanalysis.Thequalitycostinfor­matIOnsImpl~Ide~tIfiesproblem(opportunity)areas.Oncetheproblem

.~eahasbeenIdentIfied,thedetailednatureoftheproblemhastobeinves­tigatedandap~ropriateactionstaken.Theentireprocessofqualityimprove­mentandqualtty.costreductionispursuedonaproblem-by-problembasis.

BecauseofhIgh.externalfailurecosts,anaturaltemptationmightbetoplacemoreemphasIso~apprai~alefforts,butthisapproachmaysimplyconvertsome.extemalf~Ilures~oInternalfailures(suchasscrapandrework)~ndbearanmcrease~ms~ectIOnburden.Similarly,itmaybetemptingtomcreaseproductengmeenngeffortsinageneralizedattempttoprevent?efects,butagenerali~edeffortmaynotbeveryeffective.Usually,theImprov~ments.areobtamedbyactionsinthepreventioncategory.EffectivepreventIOnactIo~sarethoseaimedatveryspecificproblems-problemsthatcanbespo~lIghtedby~hequalitycoststudies.Toputitsuccinctly,theprocessofqualItyan~qual!tycostimprovementdependsonunderstandingcause-and-effectrelatIOnshIps;thestudyoftotalqualitycostsisperhapsthemosteffectivetoolavailabletomanagementtoobtainthisunderstandinab'

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QualityImprovementandQualityCostReduction109

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Figure5.4.Totalqualitycosts.

Thislastfactorisparticularlyimportantforperiodsinvolvinganexpandingoracontractingproductvolumeormix,unstablemarketpricing,shiftingsales/leasingrevenueratios,orchangingcompetitiveperformancecriteria.Accordingly,itismuchmoreproductivetoabandoneffortstocompareyourqualitycostmeasurementswithothercompanies'infavorofmeaningfulanalysisoftheproblemareascontributingmostsignificantlytoyourqual­itycosts,sothatsuitablecorrectiveactionscanbeinitiated.

Analysistechniquesforqualitycostsareasvariedasthoseusedforanyotherqualityproblemsinindustry.Theyrangefromsimplechartingtechniquestocomplicatedmathematicalmodelsoftheprogram.Themostcommontechniquesandexamplesoftheirusewillbediscussedinthischapter.TheyaretrendanalysisandParetoanalysisbyqualitycostcate­gory,element,department,product,service,orothergrouping.

TrendAnalysis

Trendanalysisissimplycomparingpresentcostlevelstopastcostlevels.Itissuggestedthatcostsbecollectedforareasonableamountoftimebeforeattemptingtodrawconclusionsorplanactionprograms.Thedatafromthisminimumperiodshouldbeplottedinseveralways.

Costsassociatedwitheachqualitycostcategory(prevention,ap­praisal,internalfailure,andexternalfailure)shouldbeplottedperiodi­cally,suchasmonthlyorquarterly,asbothtotaldollarsandasafractionofoneormoremeasurementbasesthoughttobeappropriateforfutureuseasindicatorsofbusinessactivity.Elementscontributingahighproportionofthecostswithinaqualitycostcategoryshouldbeplottedandanalyzedseparately.Figure5.4"containsaplotoftotalqualitycostsinahypotheti­calcompanyandplotsofcostsexpressedasdollarsperunitproducedandasapercentageofsales.Thegraphsshowthattotalqualitycostsareincreasingbutthattotalqualitycostsasrelatedtounitsproducedandsalesarenotchangingsignificantly.

Figures5.5and5.6aregraphsplottingqualitycostcategoriesastotaldol­lars(Figure5.5)andrelatedtothesal11etwobases(Figure5.6).Figure5.5showsincreasesinthetotaldollarsspentinallcostcategories.Costsaresta­ble,however,whenrelatedtothemeasurementbases(Figure5.6),exceptforinternalfailure.Theinternalfailure·costshaveincreasedslightlyoverthetwelve-monthperiod.Thisindicatesthatfurtheranalysisofinternalfailurecostsshouldbemade.ThetechniquemostoftenusedforfurtheranalysisisParetoanalysis.

\.AlLlPl(;{j'lVC:

110ChapterFive

Figure5.5.Qualitycosts-totaldollars.Figure5.6.Qualitycostsrelatedtobases.

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Objectivessuchasthisarerealisticandcanbeobtainedifyouknowwheretolook.TheParetoanalysistechniquewillrevealthisinformation.

Figure5.8.Paretodistributionofscrap.

QUALITYCOSTANALYSISEXAMPLEAbouttheOperationLastyear,salesfortheTransmotorDivisionofPDQCompanywereapprox­imately$25million,consistingofabout90percentindustrialcustomersand10percentgovernmentcontracts.Profitsaftertaxeswere$1.2million.

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IILL.Jlapierrive

[$450,000(scrap)+$300,000(remedialengineering)]x10%=$75,000

ParetoAnalysisTheParetoanalysistechniqueinvolveslistingthefactorsthatcontributetotheproblemandrankingthemaccordingtothemagnitudeofthecontribu­tions.Inmostsituations,arelativelysmallnumberofcausesorsourceswillcontributearelativelylargepercentageofthetotalcosts.Toproducethegreatestimprovement,effortshouldbeexpendedonreducingcostscomingfromthelargestcontributors.Intheexample,thelargestcontribu­tortothetotalcostsandtheoneshowinganincreasingtrendisinternalfailure(seeFigure5.6).Figure5.7isaParetodistributionshowingthecostscontributedbyeachelementincludedininternalfailurecosts.

Twoelements,scrapandremedialengineering,accountfor69per­centoftotalinternalfailurecosts.Paretoanalysiscanbeusedtodeter­minewherethescrapandremedialengineeringcostsoriginate.Thedis­tributioninFigure5.8showsthattwodepartmentsintheshopaccountfor59percentofthescrapcharges.Figure5.9showsthat83percentoftheremedialengineeringchargesarebeinggeneratedbytwodesignengi­neeringsections.

Thesedistributionsaretypicalofoneswhichcouldbefoundinanycompany.Usingthissequenceoftechniques,highcostcontributorscanbeidentifiedandtargetedforcorrectiveactionattention.Inthisexample,a10percentreductionininternalfailurecostsbyonlythetwohighestcostcontributorswouldmeana$75,000costreduction:

Figure5.7.Paretodistributionofinternalfailure.

114ChapterFive

Carl'sfirstattemptatestablishingaqualityengineeringprogrambeganoverayear-and-a-halfago,withthehiringofanASQCertifiedQualityEngineer.ImprovementofinspectionmethodsandsolutionstoafewchronicqualityproblemshavesinceenabledCarltoreassignsev­eralinspectorsandcovertheincreasedproductionloadwithoutincreas­ingthenumberofinspectorsinthelastthreequartersofthepreviousyear.Todate,aconsiderableamountof100percentinspectionisstillbeingdone,however,andCarlbelievesthatmoreoftheinspectionprocesscanbeeliminatedbyupgradingtheefficiencyofthemanufac­turingprocess.

QualityImprovementandQualityCostReduction115

Thecauseofthepresenthighrejectionrateonthenewproductisnotreallyknown,andthereisaconsiderableamountoffingerpointinggoingon.Manufacturingblamesafaultydesignandthepurchaseofbadmate­rial;designengineeringclaimsthattheexistingtolerancesarenotbeingmetandthatpartsarebeingmishandledbeforetheygettotheassemblyarea.Carldecidestodeterminewhichdepartmentsarethehighcostcon­tributorsbysettingupaqualitycostprogram.

StartingtheProgramThefirstdecisionthequalitymanagermustmakeiswhichunitwillbecov­eredbythestudy.Sincethereisnobreakdownbyp~ofitcent~rwithinthedivision,itisdecidedthattheentiredivisionwillbelllcludedlllthestudy.

Thenextthingthequalitymanagerdoesisdiscusst?e.conce~t.a~d

proposedprogramwiththecontrollerandrequesthermdIIIthelllltlalstudyandfuturereporting.Thecontrollerisskepticaloftheprog~am,butshedoesaareetoprovidecostsonthoseelementswhicharecompiledandusedforotherpurposes.Thecontrolleralsoagreestoprovidepersonneltoaidincompilingotherelementcostsasneeded.

Thisdonetheelementstobestudiedmustbeselected.TheelementsshowninFig~re5.10areselectedasthosemostrepresentativeoftheTransmotorDivisionoperation.Itisfoundthattherearenoseparateaccountsforsomeoftheelementsandthatestimatesmustbemadeforthoseitems.Insomecases,thisrequiressplittingamountsinageneralaccountaccordinatoanestimatedfractionofthataccountwhichshouldbechargedt~the~lement.Someestimatingcanbestbedoneb~countingthenumberofpeopleperformingsuchtasksasreworkandsortmg.W~rksamplinaisalsoavaluabletechniqueforsuchestimating.Afterdetermm­inathe~ostsourcestouseforeachelement,adetailedfirststudycanbem~de.FortheTransmotorDivision,itwasdecidedtocollectdatafortheentireprecedingyear.ThesedataareshowninFigure5.10.TheactualcostsforeachcategoryareplottedinFigure5.11.

Internalfailure,appraisal,andthetotalcostsshowanupwa.rdtrend,aswouldbeexpectedinaperiodofincreasingactivit~.PreventIOncostshaven'tchanged,butexternalfailurecostspeakeddUrIng.thefirsthalfoftheyearandnowappeartobelevelingoff.The~extstepIStofindappro­priatemeasuresofbusinessactivity(bases)toWhl~htorelatethedata.Thequalitymanagerselectsasalesbase-netsalesbIlled;acostbase-costofunitsshipped;andalaborbase-factoryhours.

$1,000100,00036,00027,000

$164,000 Totalqualitycost

Salesincreasedsteadilyfrom$1.5millioninJanuaryto$2.6millioninDecember.Thisincreasewasduetotheintroductionandwideaccep­tanceofanewproductdesign.Thenewproductwasnotonlymorereli­ablebutlesscostlytoproduce.Withasizableamountofthenewproductininventoryatthestartofthelastyear,theproductionratewasnotincreaseduntilthesecondquarter.

Duringtheyear,arecentlyhiredqualityengineerstartedworkingonananalysisofthequalityprogram.Hewasabletoimprovesystemsandprocedures,but,sincethemiddleoflastyear,highrejectionratesonthenewproduct(bothatfinalassemblyandonparts)forcedhimtospendmostofhistimeattemptingtosolvesomeoftheproblemsthatwerecaus­ingthehighrejectionrates.

Thedivision'squalitymanager,CarlHarris,hasheardaboutthequal­itycostsmanagementtechniqueandwantstoseeifitcanbenefithisdivi­sion.CarlhasattendedseveralASQconferencesandseminarsandwasabletotalkwithqualitycontrolmanagersofcompaniesthatmakeaprod­uctlinesimilartohis.Fromwhathecandetermine,itappearsthatqual­itycostsbetween4percentand6percentofnetsalesbilledarecommonincompaniesmakingsimilarproducts.Heisnotsure,however,whichcostelementsareincludedinhiscompetitor'squalitycosts.Aroughcal­culationofhisdivision'scostsforlastyear'smonthofOctoberrevealsthefollowingfigures:

PreventionAppraisalInternalfailureExternalfailure

Ui1111SJllurorUIVlslOn-lOtai(JualityCostsTransmotorDivision-TotalQualityCostsElementsJan.Feb.Mlll:Apr.Oct.Total MayJuneJulyAug.Sept.Nov.Dec.Prevention

Qualityplanning500550400300350250020025001001003,000Dataanalysisandpreventiveaction5005006007006507502508007501,0009009008,300Planningbyotherfunctions6004007007507006506506506007007006507,750Developmentofmeasurement

andcontrolequipment050000000000050 TrainingQualitysystemaudits

00000000250000250

Otherpreventionexpenses000000000000

2002502502003751907502604602251902203,570Totalpreventioncosts1,8001,7501,9501,8401,6501,9102,3101,9251,8901,87022,920Appraisal

1,9502,075

Inspectionandtest-purchasedmaterial5,2005,0006,5006,4007,45070,765 La~oratoryacceptancetesting5,9504,9205,9006,0103,9006,4107,125

Mamt.andcalibrationofequipment9259259259259259259~592592592592592511,100

Depreciationofcapitalequipment3,8403,8403,8403,8403,8403,8403,~403,8403,8403,8403,8403,84046,080

Inspection6956956956956956956956956956956956958,340

Testing52,30053,25052,27552,32551,25053,20048,87551,45052,05052,72551,40050,575.621,675

Set-upofinspectionandtest29,12030,95030,05028,42529,35031,94030,12535,83035,75038,70043,52544,100407,865

Processandproductaudits(Includedin"Inspection"and"Testing")

Checkinglabor000000000000

Inspectionandtestmaterial2,7102,8052,7403,1173,2403,1203,2503,3253,3903,4703,5153,57038,252

Outsideendorsement475803169405104252703174305251301004,518

Personnelqualification000000000000

Reviewoftestandinspectiondata0003000000300060

Fieldtestingandinspection000000000000

Accumulationofcostdata000000000000000000000000

Totalappraisalcosts95,26597,54596,791InternalFailure

95,21795,710100,15591,880102,792104,205107,410110,430111,2551,208,655

Scrap-divisionCaused

25,170Rework-division

15,02519,11218,99728,04033,9809,06020,05022,15018,22027,11024,140261,054

Caused5,200

Supplier-causedlosses6,1506,2104,9259,0106,0207,80010,50012,25010,87512,90012,040103,880

Troubleshooting1,2001,0991,2481,1701,3702,7151,1101,7951,7451,8901,3752,16018,877

Retestandreinspection2,0801,9752,1252,0202,1152,1702,05,02,2652,4502,6452,7252,94527,565

Remedialengineering(notseparatedfrominspectioncosts)

Substandardproductcosts4,2004,2507,1258,0107,8509,10010,46013,61012,99013,06011,55013,510115,715

Shopdowntime000000000000

Extraproductionoperations(notidentifiable)(notidentifiable)

Totalinternalfailurecosts37,850.28,49935,820ExternalFailure

35,12248,38553,98530,48048,22051,58546,69055,66054,795527,091

Productwarranty19,67022,30022,960 Returnedproductcost24,85022,10020,99020,50019,55018,85020,11018,90019,750250,530

Fieldservice1,800_-1;8001,8001,8001,8001,8001,8001,8001,8001,8001,8001,80021,6007,1007,1007,1007,1007,1007,1007,1007,1007,1007,100•7,1007,10085,200

Totalexternalfailurecosts28,570"·31,20031,86033,75031,00029,89029,40028,45027,75029,01027,80028,650357,330TOTALQUALITYCOSTS163,485158,994166,421MEASUREMENTBASES

166,039177,170185,870153,410181,372185,850185,035195,780196,5702,115,996

1.Netsalesbilled1,525,0001,420,500 2.Factoryhours1,872,5001,810,2001,798,4001,896,7502,086,5502,314,6402,402,5002,276,5502,697,5402,625,40024,726,530

3.Costsofunitsshipped82,65083,15282,16481,24582,36091,20083,75096,750112,750115,750115,70091,2501,118,471

1,225,0001,315,5001,275,2501,095,6501,080,9751,205,6201,125,0501,397,4501,334,1501,400,5001,602,9301,625,62515,683,700Figure5.10.Totalqualitycosts-TransmotorDivision.Figure5.10.(continued)116

117

QualityImprovementandQualityCostReduction119

Actualqualitycosts

Totalcosts

Internalfailure

Externalfailure

Prevention

°

40,000

60,000

20,000

180,000

160,000

140,000

120,000

Appraisal

i':'-'!!100,000 00

80,000

Figure5.11.Actualqualitycosts.

118ChapterFive

Thesedataarecollectedfromaccountingandindustrialengineering,andcostsfromeachcategoryareexpressedasapercentofthebasescho­sen.GraphsofthesepercentagesareshownasFigures5.12,5.13,and5.14,respectively.

Whenexpressedasapercentofsales,totalcosts,appraisal,andexter­nalfailureshowadownwardtrend,whilepreventionandinternalfailureareessentiallyunchanged.Thesetrends,however,arenotvalid,sincesalesinthiscaseisnotagoodmeasureofthekindofactivityproducingthecosts.Mostofproductbilledoriginatedfromwarehousestocksforthefirsthalfoftheyear.ExceptforaDecemberspikeinqualitycostsasaper­centoffactoryhours,theratioplotsusingfactoryhoursexhibitroughlythesametrendsasthoseusingcostsofunitsshipped(theDecemberrisewasduetoadipinfactoryhoursbecauseoftheDecemberholidayperiod).Totalcostspeakedaboutmidyearandappeartobedecreasing.Appraisalandexternalfailurecostratiosdisplayaslightlydownwardtrend.Preventionhasnotchanged.Thisanalysisinvitesattentiontotheincreasinginternalfailurecostratio.Itisfoundthatthemajorcontributorstotheincreasearerework,scrap,andremedialengineering.Thesethreeelementswereresponsiblefor91percentoftheinternalfailurecosts.Thelargestdollarcontributorisscrap,contributing50percentoftheinternalfailurecosts.Graphsofinternalfailurecosts,aspercentagesofcostsofunitsshipped,areshowninFigure5.15.

Thisleadstothequestion"Wherearethesecostsbeinggenerated?".ThequalitymanagerrequestsabreakdownoftheSourceofthethreelargestdollarcontributorstotheinternalfailurecosts:scrap,rework,andremedialengineering.Itisfoundthatthreesectionsoftheshop(Winding,Feeder1,andFeeder5)generated82percentofthescrapduringthepre­viousyear.Twosections(WindingandAssembly)contributed73percentofthereworkcharges,andonemodel(Model'T)accountedfor60percentoftheremedialengineering.Figure5.16showsParetographsofthesecostbreakdowns.

Thequalitymanagernow'hasenoughinformationtobegintodevelopacorrectiveactionprogram.Tobeeffective,itmustinvolveboththemanufacturingmanagerandtheengineeringmanager,sincetheelementswhicharethelargestcontributorstointernalfailurecostsare.theresponsibilityofthesefunctionalmanagers.Thequalitymanagermustalsoexaminecostswhicharehisownresponsibility-preventionandappraisal.ReductionsinoverallcostswiIIrequireaprogramofcooperativeeffort.

Internalfailure

Externalfailure

Prevention

Qualitycostsasa%ofcostsofunitsshipped

QualityImprovementandQualityCostReduction121

4.0

200

2.0

18.0

16.0

14.0

FigureS.l3.Qualitycostsasapercentofcostsofunitsshipped.

Qualitycostsasa%ofnetsalesbilled

Appraisal

Internalfailure

Externalfailure

Prevention

200

18.0

16.0

140

2.0

4.0

o

12.0

12.0Totalcosts

C....,c

(I)

10.0(I)

1~\

~

~10.0(I)

(I)

CL

CL

8.0

8.0 Totalcosts

Appraisal6.0

6.0

Figure5.12.Qualitycostsasapercentofnetsalesbilled.

123

-'-1-

Scrap

RemedialengineeringRework

Troubleshooting

Vendor-causedlosses

QualityImprovementandQualityCostReduction

30

2.0

1.0

0.2

o

0.1

C::J

(;~

ou(;~

c(l)2(l)"-

Figure5.15.Internalfailurecosts.

Externalfailure

Prevention

175

Totalcosts

225

200

Qualitycostsasa%offactoryhours

250

Internalfailure

75

50

o

25

150

~

c

0

<1J2125 <1J"-

Appraisal

0.4100

122ChapterFive

Figure5.14.Qualitycostsasapercentoffactoryhours.

RemedialEngineering

~80~HH--+-+-+--+-t--!--+--l-1~l;;,.;..'f.i ..;..H-l-+-+-+-+++--+--.+---lg60BH-l-+-+-+-+++--+--.+---l-£.r.@rl-+-+-+-+-I--l-+-+-..l---J:540bi/H-+-+-+-HH-t--+--l--l---lVI

~201~t:!::J,,:,:- _.....--t ...-+-+-++++--+--.+---l

Am.eetingisheldwiththeresponsiblefunctionalmanagers,atwhichth~qualItymanager~resentstheresultsofhisstudyandanalysistothispOInt.Eachman~gerISaskedfortheirviewsontheprogramandwhetherthecostsforwh~chthe~arer~sponsiblecouldbereducedand,ifso,byhO~~uch.AtthISmeetmg,objectivesandplansfortheirachievementaresolICitedfromeachresponsiblemanaoer. ..•.b

Th.eI~ItIalreportcontains..alldataandgraphsgeneratedinthestudy,theObjectIVesforcostreductwnandplansforreachinotheob,iet' ..d-'bJCIves.ObjectIVeSevelopedbythemanagementteamareasfollows:

1.R~d~cetheoverallqualitycoststo6.7percentofnetsalesbilledwithmoneyear

2.Reduceappraisalcoststo3.3percentofnetsalesbilledwithintwOyears,andto3.6percentwithinoneyear.

QualityImprovementandQualityCostReduction125

3.Reduceinternalfailurecoststo1.8percentofsaleswithinoneyear

4.Maintainexternalfailurecostsatnomorethan1.1percentofsales

Actionprogramsforattainmentoftheseobjectivesareasfollows:

1.Hireanadditionalqualityengineerchargedwiththeresponsibilityforidentificationofthecausesofhighcostproblemsand

coordinationofcorrectiveaction

2.Reassignthepreser>qualityengineertothetaskoffmdinglesscostlywaysofinspectionandtest,andwaysofeliminating100

percentinspection

3.Setupteamsconsistingofrepresentativesofmanufacturing,engineering,andqualityinthesectionsoftheshophavinghigh

scrapandreworkcosts

4.SetupataskforcetodeterminethecauseoftheexcessiveremedialengineeringcostsontheModelTunit;setanobjectiveforreductionofthecosts,andreportprogressregularly

5.Determinethecausesofthehighestcostfieldproblem.Ifshop­caused,assigntotheshopteamsforaction.Ifcausedbydesignorapplication,assigntothetaskforceforattention.Setobjectives

andrequirereporting

6.Issueaqualitycostreporteachquarter,showingperformanceagains~objectivesanddiscussingmajorproblemareasandplans

forreductionofcosts

Atthispoint,weleavetheTransmotorqualitymanagerwiththeknowl­edgethatheiswellonhiswaytoeliminatingmanyofhisheadachesandmakingthequalityfunctionaprofitcontributorforthedivision.

THETEAMAPPROACHOnceaproblemhasbeenidentifiedandreportedandtheinvolvedper­sonnelarecommittedtoaction,thejobisstartedbutfarfromcomplete.Theeffortsofthepeopleinvolvedmustbeplanned,coordinated,sched­uled,implemented,andfollowedup.Normally,problemscanbethoughtofasoneoftwotypes:thosewhichoneindividualordepartmentcancorrectwithlittleornooutsidehelpandthoserequiringcoordinatedactionfromseveralactivitiesintheorganization.ExamplesOfthefirsttypeofproblemincludeoperator-controllabledefects,designerrors,and

tiononallphasesofqualitycostsand.therebyimproveth~quality,safety,reliability,andenvironmentaleffectsofproducts,whIlereduc-

ingtotalqualitycosts.

EstablishingandImplementingtheDivisionPHPr~~r.am.ItwasdecidedtoimplementthePHprogramintheexampl~dIVISIOntoplacegreateremphasisonthetotalqualit~costs.Thepnmaryeven.tsthatoccurredtoestablishandimplementthISprogramwereasfollows.

1.Receivedtopmanagementcommitment,support,andinvolvement

2.OrganizedthePHprograminthedivision

a.AssignedresponsibilityforthePHprogramtoamemberofthedivisionmanager'simmediatestaff

b.EstablishedaPHcounciltoassistthePHpro.gramd

.n:~nagerindeterminingtheoverallapproach,developmg1~lslOn

strategy,andimplementingthepro~ram:thecounCIlmembersincludedthedivisionengmeenngmanager,manufacturingmanager,controller,andqualityn:anager

c.ConductedaPHseminarwithheadquartersq~alItyassuranceassistancetointroducetheconcepttoresponsIble

managementpersonnel

3.Identifiedthequalitycostelementsandselectedaccountsources

4.Collectedallthequalitycostsforthedivisionforthe?revioustwelve..monthstoestablishthetotalqualitycostbaselIne

5.Analyzedthedivisionqualitycostdataandi.den:i~eddt~emostsignificantqualitycostexpenditures.AnalysI~?teaaindicatedthatinternalfailurecostswererequ~nnga.disproportionateexpenditureands~ouldrec~lveth~hIghestpriorityforaction.AsaresultofthISanalySIS,qualItycostswere

foundtobe

QualityImprovementandQualityCostReduction126ChapterFive

inspectionerrors.Examplesofthesecondtypeincludeproductperfor­manceproblemsforwhichacauseisnotknown,defectscausedbyacombinationoffactorsnotunderonedepartment'scontrol,andfieldfailuresofunknowncause.

Anelaboratesystemisnotrequiredtoattackandsolveproblemsofthefirsttype.Mostcanandshouldberesolvedattheworkinglevelwiththeforeman,engineer,orotherresponsibleparties.Usually,theworkingpersonnelofthesedepartmentshavesufficientauthority(employeeempowerment)toenactcorrectiveaction,withindefinedlimits,withoutspecificapprovaloftheirsuperiors.

Unfortunately,problemsofthesecondtypearenormallythemostcostlyandarenotaseasilysolved.Causesofsuchproblemscanbenumer­ousandunknown.Solutionsmayrequireactionfromseveralsources.Theinvestigationoftheproblemandtheplanningofitssolutionmustbecoor­dinatedandscheduledtoassurethateffectiveactionistaken.Oneofthebestdevicesfordoingthisisthequalityimprovementteam.Workingwiththedataandproblemanalysisreportsandheadedbyanindividualwhoisinterestedinsolvingtheproblems,thisteamdevelopstheplanandthencoordinatesandschedulestheinvestigationandaction.Ithasbeenfoundthataninterestedindividualwithlineresponsibility(suchasageneralfore­man)makesthebestchairpersonforsuchagroup.Eachprojectshouldbedocketedandactionscheduled.Meetingsshouldbeheldregularlyandminutespublished.

CaseStudy1-ProfitImprovementAmajorelectricalfirminitiatedacorporateprogramtoidentify,analyze,andreducequalitycosts.ItwascalledtheProductIntegrityImprovement(PH)program.Aformalmanagementcommitmenttoimprovementofqualityandanorganizedapproachtoobtainingthisimprovementhaveledtoprofitimprovementatseveraldivisions.Thisexampledescribestheapproachusedandtheresultsobtainedinonelocation.

Inmostindustrialenvironments,thehighestsegmentsoftotalqual­itycostsarefoundininternalandexternalfailurecosts.Therefore,mostorganizedeffortstoreducecostsandimproveprofitsareconcen­tratedinthisarea.Itshouldbestated,however,thatbyplacinggreateremphasisinthepreventionactivity,asignificantimprovementinqual­itycostswillberealized.ThePHprogramwasintendedtofocusatten-

PreventionAppraisalInternalfailureExternalfailure

Total

PercentofSales0.11.52.3

U-5.4

127

CoresWire

Coilwinding-assemblyFinalassembly/testOther

0.11.22.11.2

4.6

CurrentYearActual

0.11.32.0U4.5

CurrentYearObjectives

0.11.52.3

U5.4

PreviousYearActual

QualityImprovementandQualityCostReduction129

II.Educated,trained,andemphasizedtheimportanceofeveryonedoingthejobrightthefirsttime.Employeeinvolvementwasmostimportantinattemptstoachieveimprovement.Thiswasaccomplishedinanumberofways:

a.Generalforeman,qualitysupervisor,sectionforemanmeetings,atwhichthey

(l)identifiedkeyprojectstobeworkedon(2)plannedprogramsforimprovement(3)reviewedprogr~ss

b.Defectchartsforeachmanufacturingsection,showingobjectivesandactualcosts

c.Workplacemeetingstoestablishaqualityconsciousattituded.Trainingprogramsforcertaincriticalskill,highcostareas

12.Recognizedindividualsand/orgroupsthatmadesignificantcontributionstowardimprovement

CostsasaPercentofSales

Resultsobtainedfromthisprogramweresignificant.

Summary.ThesuccessofaPHprogramdependson

1.Topmanagementinvolvementandsupport

2.Visibletotalqualitycostdata

3.Settingdivisionobjectivesforimprovementandmonthlyreportingofperformanceagainstobjectives

4.Organizingforimprovement

PreventionAppraisalInternalfailureExternalfailure

Total

Internalfailurecostswereanalyzedtofidthh'h '.neIgcostcontnbutors,wIththefollowingresults:

ApproximatePercentofTotalInternal

FailureCost

520351525

Thecoilwinding-assemblyareawI..itaccountedforthelargestpofcafshseected.SIncecollectivelycost.rIOn0tetotalInternalfailure

6.Determinedbasic.problemsandunderlyingcausesoftheproblem.sandassIgnedresponsibilityforcorrectiveaction

a.IdentIfiedthreeunderlyingcauses:

(l)operatorwindingerrors(2)damagetocoilsinhandling(3)designproblems

b.Establishedaqualityimprovementteammadeupof

Man~facturingmanager-chairpersonQualItymanagerManufacturinaeng". ..bmeenng-eqUlpmentprobleEngmeenng-designproblemsmsGeneralforeman-operatorproblems

7.Establishedqualitycostimrove'.partofthed'..,PmentobjectIvesasanintearal

IVISlOnsprofitplanb

8.Createdreportinasyt.~bSemstoproVIdeaccuratecostv·'bT

tomeasureImprovementperformancelSI1Ityand

9.MetweekI;toreviewpa.taskstobetompletedrobress,establIshplans,andassignnew

10.Reviewed~~nthlytotaluart..initiatedcorrectiveactI'oqhIYcostsagamsttheobjectivesand

nwereneeded

QualityImprovementandQualityCostReduction131

AhAreviewofthepriorsixmonths'failurehistorywasinitiated.

pproac...dndcategoAllofthediscrepancyreportswereevaluated,summanze,~-rized,andhighscrapandreworkcostareaswerefound(seeFIgure5.~7).

Itwasapparentfromthissummarythatnearly85percent~fallreJec­tionsoccurredastheresultofcontaminatedpartsduetoImprope:lyappliedorexcessivelyappliedadhesives.AsaresultoftheexceSSIvecleaninerneededtoremovetheadhesives,anaverageof80connectorspermo'nth~erescrapped.Thisaloneamountedtoalmost$20,000peryear.

Cause.Basedonthesedata,thecausesoftheproblemswerefoundtobe

1.Methodsusedforadhesivesapplicationneededupdatingforthis

newconnectorseries.

2.Operatorsrequiredadditionaltrainingintheapplicationofadhesives.

3Bothoperatorsandinspectorsdidnotunderstandthecomplete-'workmanshipstandardsdevelopedforthisprogram.Asaresult,

theoperatorswereperformingunnecessaryrework.

4.Someoftheoperatorswerecausingalargerpercentageofrework

andscrapthanothers.

CorrectiveMeasures.Oncethecausesw~reide~tified,.acorrectiveact~:teamcomposedofaqualityengineer,anmdustnalengl.neer,andthe.P

td

ductionsupervisorwasorganized.TheproductionsupervIsorwasappome

toheadtheteam..Thisteamaccomplishedthefollowmg:.

.d.inermanufactunner1ThefirsttwomonthsweredirectetoreVIewb••b

.instructions,revisingmethods,obtainingnewtools,andrevIsmg

theworkmanshipstandards.

FailureCostsbyCostCenter

67.034.0

101.022.079.0

CC:2450(ConnectorAssembly)

($000)

57.617.775.341.234.1

CC:2441(Bonding)($000)

Firsthalf,year1Secondhalf,year1Total,year1Total,year2NetSavings

5.Establishingaqualityimprovementteam

6.Employeeinvolvementandrecognition

130ChapterFive

ThebenefitstobegainedfromaproperlyimplementedPHprograminclude

1.Reducedtotalqualitycosts,withacorrespondingincreaseinprofits

2.Improvedproductperformance,productintegrity,andadherencetoschedule

3.Increasedcustomeracceptanceofproductsandservices

4.Increasedrepeatsalesandnewsalesfromimprovedproductreputation

CaseStudy2-FailureCostImprovementAmajorconnectormanufacturerelectedtoentertheconnectormarketwithanewconnectordesigntoMIL-SPECrequirements.Thefollowingdiscussionillustrateshowinfouryearstheproductassemblyfailurecostwasreducedfrom$180,000peryearto$20,000peryear.

History.Duringtheprogram'searlyphases,typicalstart-upproblemsassociatedwithnewmanufacturingtechniques,planning,andtrainingwerefaced.Theseitemswereresolvedone-by-oneuntilassemblyfailurecostsdecreasedtoapproximately$180,000,anamountthatisstillcon­sideredabovenormalforanewconnectorprogram.

Threeyearslater,afailurecostsplateauof$150,000peryearhadbeenreached,afigurethatstillwascomparativelyhigh.Itwasnotknownthataconsiderableportionoffailuredollarsoriginatedintheassemblydepart­ments.Usingthefinancialdataavailable,failurecostsbyspecificcostcenterintheassemblydepartmentswereidentified(eachcostcenterisresponsiblefortheassemblyofaspecificconnectortype).

Itwasobservedthattwospecificcostcenterscontributedtoover75per­centoftheassemblydepartments'totalfailurecoststhroughthatperiod.Onemajorcostcenterwaswherebondedassembliesforotherconnectorsweremanufactured.Thisareawasalsothetargetformajorcostimprovements.

Fromthetableonpage131,itcanbeseenthat,usingthefirsthalfoftheyearasabaseandholdingsalesconstantthroughthesecondhalfoftheyear,anotherlargedollarfailurecostyearwouldresultintheconnec­torarea.Theproblemneededtobeattackedimmediately.

I.:)LCflapterj'/ve

80

70

60

Percentof

totalrejects

20

10

Damagedcomponents

~---Miscellaneoushardwaredefects

~-----Contaminatedsubassemblies

~-------Contaminatedfinishedconnectors

Figure5.17.Rejectioncauses.

2.Anewm~thodrequiringtheapplicationofadhesivesthroughtheuseofasIlkscreentechniquewasintroduced.

3.~perators~ausingalargerpercentageofreworkandscrapwereeItherretramedorreplaced.

4.Theinspect?rswereretrainedintherequirementsofthemodifiedworkmanshIpstandards.

~ostsforthesethangeswereapproximately$4,000intoolino-and$3000mlabor.-'.b,

Results.Thet~bleonpage131comparestheresultsofthefirsthalfofyea~Itothesecondhalfo~yearI.Failurecostsinthisareadecreaseddra­matIcally.NotethatthefaIluredollarsinthebondedassemblycostcenteralsodecreasedasaresultofapplicationofthesametechniqueslearnedintheconnectorarea.

QualityImprovementandQualityCostReduction133

ThetablealsocomparestheresultsofyearItothoseofyear2.Theresultsyieldedanetsavingsinfailurecostsofalmost$80,000foryear2intheconnectorarea,despiteincreasedsalesvolume.Therewasalsoa$34,000savingsinthebondingarea.

Summary.Byusingthetoolsavailableandtheteamapproach,aproblemwasidentified,itscausefound,andcorrectiveactioninitiatedtopreventrecurrence.Thisresultedinanetsavingsequivalenttoasalesincreaseofover$350,000ontheseproducts.Thiswasaccomplishedbyrecognizingthatsmallpiecesofalargerproblemcanmoreeasilybedigestedandresolvedoneatatime.

TEAM-BASEDPROBLEMSOLVINGQualitycostsareespeciallyusefulforqualityimprovementteams,astheyenabletheteamstoquantifythefinancialimpactoftheirprojects,bothforthemselvesandfortheirmanagement.Thefollowingexampleintegratesqualitycostswithteamproblemsolvingand,althoughtakenfromaser­viceorganization,worksequallywellformanufacturingorganizations.

Step1.FormorSelectCross-FunctionalTeamsThebestwaytoobtainmanagementsupportistoshowhowteam-basedqualitycosttechniquescanimprovetheorganization'sbottomlirie.Byfocusingonkeybusinessprocesses,suchasorderadministration,newprod­uctdevelopment,sales,serviceormanufacturing,qualitycostmeasure­mentscanbeusedtoshowan"asis"vs.a"couldbe"performancebaseline.

Let'stakecustomercomplaintsasanexampleofaproblemtobesolvedandformateamtoaddressthisissue.Across-functionalteamforthisproblemmightincludeteammembersfromSales(theteamleader),CustomerService,Manufacturing,Engineering,andQuality.

Step2.InitiateProblemSolvingTobesuccessfulwithteam-basedqualitycosttechniques,teammembersmustunderstandbasicproblem-solvingtechniques.Thisincludeshowtowriteproblemstatements,developcause-and-effectdiagrams(alsoknownasIshikawaand"fishbone"diagrams),andbeabletobrainstormforpoten­tialrootcausesofproblems.

Typically,thequalityprofessionalisthekeypersonwhowillplanforandproposethatteam-basedqualitycosttechniquesbeundertaken.Usu­ally,thequalityprofessionalisalreadyfamiliar\Viththeconceptofquality

134ChapterFive

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THEEFFECT

Problemisanexternalfailure.

Lackoftraining

Nocertifiedoperators

Problemstatement:

)\/customercomplaintNopower-up

Lackofcertifiedsuppliers

PoordesignofPCboard

THEROOTCAUSES

Lackofprocedure

Lackoftestbox

Lackofcalibratedequipment

Figure5.18.Cause-and-Effectdiagram.

costsandproblemsolving.Ifneeded,trainingshouldbeobtainedforthequalitycostsprojectleaderand/orimplementationteamontheprinciplesofqualitycosts.Aqualitycostsrefreshercoursecanbemosthelpfultoreopenthethoughtprocessandgeneratenewideas.

Inourexampleofcustomercomplaints,theteamdecidedtolookatthetypesofcustomercomplaintsandhowoftentheyoccurred.Thisinfor­mationcanusuallybeobtainedfromtheCustomerServiceorQualitydepartments,whicharelikelytobetrackingcomplaintsbytype.Inourexample,itisdeterminedbytheteamtolookataspecificcustomercom­plaint~"nopower-up"~basedonthefactthatitoccurredfrequentlyanddirectlyimpactedtheexternalcustomer.

Asaresultofteambrainstorming,thecause-and-effectdiagramshowninFigure5.18resulted.

Step3.CalculatetheFclilureCostofOneOccurrenceOncethecause-and-effectdiagram(s)havebeendevelopedandbrain­stormingforarootcausehastakenplace,it'stimetocalculatethecostofoneOCcurrencefortheproblemselected.AworksheetcanbecreatedlikeTable5.1.

NotethatwhencreatingaCostofQualityWorksheet,itshouldbekeptsimple.Initially,includeonly·thebasic·"tasks"thatmustbeperformedto

QualityImprovementandQualityCostReduction137

Step4.CalculatetheTotalFailureCostforaGivenPeriodNowthatthecostofoneoccurrencefortheproblemhasbeencalculated,theactualnumberoftimesthisproblemoccurredneedstobedetermined.Thisinformationcanusuallybeobtainedfromqualityproblemordefectreports,suchasCustomerServicecall-inlogsandinspectionsheetsorfromauditreports.

Inthisexample,ifthrewere48occurrencesinoneyear,thetotalexternalfailurecostfor"CustomerComplaints-NoPowercUp"wouldbe$16,524.48annually($344.26multipliedby48occurrences).Aproblemthatoncemayhaveappearedinsignificantortolerablenowhasrenewedattentionusingqualitycostfailuredollars.

482036

121

NumberofAnnualOccurrences

AnnualFailure$

$16,524.48$11,838.1I

$9,333.58$6,423.15

FailureTypeProblem

Description

IF=InternalFailureEF=ExternalFailure

Nopower-upEFComputerdowntimeIFOrdershippedlateEFPaperworkincompleteIF

Table5.2.Paretoanalysisoffailurecosts.

Step5.RankProblemsbyFailureDollarsUsingParetoAnalysisYoucannowrepeatthecostingprocessforseveralotherproblemsordefecttypes.Boththenumberofoccurrencesandthecostofqualityforbothinternalandexternalfailurescanbeviewed.

Intheexample,thefailurecostParetoanalysisworksheet,rankedbyannualfailurecostswouldlooklikeTable5.2.Noticethatthemostfre­quentlyoccurringproblemordefectdoesnotalwayshavethehighestfailurecost.Takingcorrectiveactiononthe"nopower-up"problem,selectedbytheteam,willgivethemostreturn.Qualitycos~anal'ysishelpsprioritizeproblem-solvingactivities.~fc~urse,consld~ratIOns

suchascriticality,complexity,andeaseandtimelInessofsolutIOnalsocomeintoplay.But,beforeinvestingmuchtimeormo~eyinsolutio~s,itisimportanttohavequalitycostdatashowingsigmficantfinanCialimpact.

findandfixtheproblem.Besuretolistthetimeinthe'~verageHoursperTask"columnindecimalhours.Tasktimecanbeobtainedbyusingindus­trialengineeringestimatesorbysimplyaskingthepeopleinvolvedinthecorrectiveactionprocess.Rememberthattheseareaveragesanddonothavetobeexactmeasurements.Qualitycostreportingshouldbeusedformanagementreporting,notfordetailedfinancialreporting;hence,solidestimatesareacceptable.

The"HourlyRate"columnistheaverage"loaded"hourlyrate,i.e.,includingbenefits,forthedepartmentperformingthetask.ThisratecanbeobtainedfromtheFinanceDepartment.Ifsuchinformationisnotavailable,simplydeterminetheaveragehourlyratebydividingthetotalwageschargedtothedepartmentbythenumberofemployeesinthedepartment.Forexample,ifsixpeopleworkintheCustomerServiceDepartmentandtheweeklypayrollis$8350,theaveragehourlyrateis$8350/40hours/week,equaling$208.75/hour,whichisthendividedbysixpeople,toequal$34.80/hourperperson.Intheexample,theaveragehourlyrateof$35/hourisusedfortheCustomerServiceDepartment.Ifmorethanonepersonisinvolvedintheprocess,multiplythenumberofemployeesbythefigureinthe"CostofElement"column.Asimilarapproachistakenforotherdepart­mentsinvolvedintheprocess.

The"CostofElement"columnistheresultoftheAverageHoursperTaskmultipliedbytheHourlyRate.The"MaterialCosts"columncon­tainsthoseexpensesthataretrue"out-of-pocket"costs,suchasinventoryitems,partcosts,unplannedtravelexpenses,andotherreal"receipted"expenses.

WhendecidingwhetherthecostoftheproblemisanExternalorInternalFailure,simplynotewherethedefectisfound.Allexternalfail­uresarefoundbythecustomer;hence,allthecostcalculationsremaininthe"ExternalFailure"column.Thecostiseitherallexternalorallinter­nalfailure,notamixtureofboth.Thecostsarethenaddedhorizontallyacrosstheworksheetandtotaledinthe"TotalFailureCost"column.Thetotalcostofoneoccurrence,inthisexample,is$344.26,whichisobtainedbyaddingthefinalcolumn.

Itishelpfultocodetheproblem.Inthisexample,"EF-NP"isusedandrecordedintheworksheettoabbreviatetheproblemdescriptionof"CustomerComplaint-NoPower-Up"-ExternalFailure.Suchcodingisusefulwhenqualitycostinformationisputintoasoftwareprogramtodeterminetrends.

$17,024.48

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FAILUREREDUCTIONANALYSIS

Externalfailure

Oth"hiddenfactory"failurecosts(for~nplannedmailingexpenses/year)

Totalfailure

Annualachievablefailureredouction(teamgoalistoreduceby50Yo)

dQlIit)'CostReduction139 QualityImprovementallu(,

TotalallIF+EFdollarsfromCOO

worksheets.

Addanyotherhard/softcosts.

Estimateachievablefailurereduction.

dbackperiodworksheet. F·519Thereturnoninvestmentanpay 19ure..

I.tnopower-upwithan -fOI"theproblemofcustomercompams- year,48annualexternalfailurecostof$16,524..

Step8.CalculatetheReturnonInvestment(ROI)

andPaybackPeriod.reventionplandeveloped,youcanOncethereductiongoa~ISsetandt~:pfit/cost)andpaybackperiod(thecalculatethereturnonmvestmhen~ent~~ntspentonprevention).Thisis

"ktbeakevenontemveskhttimeIttaes0rdbcalculatedusingaworsee doneforeachproblemselectedancane

liketheoneshowninFigure5.19.Ifailurecostofforty-eightoccur­

Theexampleshowsth~c~::~~:rcomplaints-nopower-up,whichrencesfortheproblemofdd'.I$500wasaddedforunplanned

52448uallyAnaItIona..Itotals$16,.ann'..bt'edfromFinance,gIVIngatota f.htharaeswhIchwas0amthopremium~eIgcb'448RecallthattheteamassignedtoISexternalfarlurecostof$17,?2'h'bofoccurrencestotwenty-four,problemcommittedtoreducrngt.eIlumer....

138ChapterFive

Table5.3Proposedpreventionplan&costs.

RootCauseProposedTasks$Rate DescriptiontoEliminateHoursNeededTotal$ LackofprocedureWriteprocedure3.0$50/hr.$150 NocertifiedoperatorsTrainandcertify40.0$35/hr.$1400 andlackoftrainingoperators

LackofcalibratedCalibrateequipment2.0$35/hr.$70 equipment

LackofatestboxMakeatestbox4.4$50/hr.$220 LackofcertifiedFindISOregistered2.0$35/hr.$70 supplierssupplierPoordesignofNonenlanlanla PCboard

Totalpreventioninvestmentrequired$1910

ProblemDescription:CustomerComplaint-NoPower-Up(anExternalFailure)

Step6.lookattheCause-and-EffectDiagramandProposeaPreventionPlan

Apreventionplantoeliminatetheproblem'srootcausescannowbepro­posed.Thisisdonebylookingatthefishbonediagram:anddevelopingaplanfortheapplicationofpreventionresources.

UsingOurexampleofcustomercomplaints-nopower-up,whichhadanexternalfailurecostof$16,524.48annually,andtheassociatedfish­bonediagram(Step2),theproposedpreventioncostscanbecalculatedasinTable5.3.

Step7.SetTeamGoalforReducingFrequencyofOccurrenceThenextstepisfortheproblem-solvingteamtoestimatethelevelofOCcurrencereductiontheybelieveispossible,iftheproposedpreventionresourcesaremadeavailable.Dependingonthecomplexityoftheprob­lemandtheassociatedfishbonediagram,Someteamsmaycommittoa100percentreduction(goalofzerodefects),whileothersmaycommittosomethingless.Becarefulnottoovercommit.Shouldsomethingoutsidethecontroloftheteamoccur,anaggressivegoalcanbediscouragingtotheteamandcommitmentcandiminish.

Intheexample,theteamselecteda50percentreductiongoal-thatis,reducingthenumberofoccurrencesfromforty~eighUotwentycfourper

QualityImprovementandQualitycJ~rRCdtlG'titif!,;i,i.41"·'·-'·// 1:/{

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WORKINGWITHSUPPLIERSTOREDUCESUPPLIERQUALITYCOSTS

Supplierqualitycostscanbereducedbyworkingwith.su~pliers.Son:e

companiesdebitsuppliersforthescrapandreworkoc.currmg111theb~yersplanttoplacetheresponsibilityforfailureswhereIthurtsmost----:1I1thepocketbook.Inthelongrun,however,thismaybec~un~erpr.oductIve,as.somesuppliersmayaskforapriceincreasetocoverthISsItuatIon.Anothel

m,,eth,od,0,f"ten,u,se,d,ist,o,,reducetheamountofbusinessgiventothe.offender,fh"d" rewardingthegoodperformerwithagreatershare0teorerpIe.

Conclusion'Themethodologypresentedisintendedtoprovidearoadmap~fhowqual-itycostscanbecalculatedbyproblem-solvingteams.ItprovI~esafoc~stoprocessimprovementteams,managers,andotherswhoare1I1volved111

qualityimprovement.

ImplementationC:;uidelinesFourauidelinesshouldbeconsideredwhen b.

costofqualityproblem-solvingtechl11ques:

1.Theteam-basedqualitycostproblem-solvingtechniqueiscent~red

dtheidentificationofaproblemandtasksthatresulteachtImearound"Iaproblemoccurs.Thesetasksarethenassessedu~derthetraItlOna,qualitycostdefinitionsofexternalandi~temalfailure.Thetotalcost

oftheproblemonaperoccurrencebaSISresultS.

2.Team-basedqualitycostproblem-solvingtechniques~houl.dbeusedwithexistinateamsorteamsthatareplanned.Dontre-1I1ventthewheelorcallthisa"newandimprovedqualityprogram."MakeQual­ityCostspartoftheteam'sweeklyormonthlyreportingprocess.

3.Financeshouldreviewandapprovecalculationworksheetsandanyassumptions.Don'tcreateanewaccounting.system.Team-~asedqualitycostproblem-solvingtechniquesarenot1I1te~dedtomO~IfYorreplacetheexistingaccountingsyster:n.It'scal~UI~t10~Sare~stI~atesbutaredeterminedwithlogicandratIonale.EXIstmgappraisal.sys­tems:canbeusedtocapturethefrequencyofoccurrenceandarelIkely

tobereadilyavailable.

4.Providetraining.Someusersexperiencedifficultywithteam-~asedproblem-solvingtechniqueswhenfirstintroducedtothetechmque.

14UChapter!'lve

a50percentreduction-thatis,reducingfailurecostsby$8,512.24.Thisisshowninthefigureasthe"AnnualAchievableFailureReduction."

Recallfromthepreventionplan,thatthepreventiondollarsproposedis$1910.Thebenefit/costratioisthencalculatedbydividingachievablefailurereductiondollarsbypreventiondollars($8512.24/$1910),aratioof4.5:1.Thismeansareturnoninvestmentof$4.50foreverydollarinvested.Whencomparedwithothercostedproblems,orperhapseventhoseassignedtootherteams,thisproblemcouldbeselectedasoneworthwhiletopursue.

Thepaybackperiodiscalculatedsimplybytakingtheinverseofthebenefit/costratio.Intheexample,$1910/$8512.24equalsapaybackperiodof0.224years,or82days.Thismeansthatthepreventioninvestmentof$1950willpayforitselfinlessthanthreemonths.Again,comparingthiscalculationtoothercostedproblemscouldproveitworthwhiletopursue.

Boththereturnoninvestmentandthepaybackperiodcalculationscanbeusedtoselecttheproblemwiththehighestreturnandshortestpaybackperiod,helpingteamsshowtheresultsofeffectiveproblemsolvingtomanagement.

Step10.TrackProgressandRepeatP,=ocess-onAnotherProblem.

Aswithanyqualityimprovementproject,progressmustbemeasuredandtracked.Thetechniquepresentedoffersasimpleapproach---countingthenumberofoccurrences.Bycountingthedecreaseofoccurrences,thecostofqualitywillalsoshowadecrease.Numberscaneasilybesummarizedbyweek,month,orotherselectedreportingperiods.Aftertheplanhasbeenimplementedandprogresshasbeenmade,theteamcanrepeatthisqualitycostproblem-solvingprocesstomakefurtherimprovel11eritsinthecompany.

Step9.Make-PresentationtoManagementUsingthereturnoninvestmentandpaybackperiodworksheet,theteamcannowmakeapresentationtomanagement,requestingthatthepreventionfundsbeauthorized.Thisformatisparticularlyusefulwhenotherproblemsarecostedorwhenotherteamsareseekingthesamepreventionfunds.Pre­ventionfundsarelimited,andusuallythefundingofallimprovementpro­jectsatthesametimeisnotfeasible.Byusingthisworksheet,managementcannowevaluateandselectwhichproblemsteamsshouldpursue,basedonwhichproblemshavethehighestreturnoninvestmentwiththeshortestpay­backperiod.

*MateriaJforthissectionwasextractedfrom"DrivingBuyerSatisfactionbyQualityCost"byWilliamO.Winchell,publishedintheTransactionsofthe50thASQCAnnualQualityCon­gress,ASQMilwaukee,1996.'

143 QualityImprovementandQualityCostReduction

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b~hol~er~nd,wi~hquality,thebuyeristhe~e~~~~e;~J:~~X~~~~~e~:i~buyerISofareatImportancetoacompany..thefuturehaveagre:terwillingnesstorepurchasefromacompanym.

ThisrelationshipisshowninFigure5.20.

FigureS.20.Buyerperceptionofqllality........870

Basedondatafrommarketingstudy(JuranandGryna,1993page).

Buyerperceptionofquality

Background.SomeofthevaluesandbeliefsofacompanynecessaryforaneffectIve

continuousimprovementeffortinclude

1.Focusisonbuyersandtheirneeds.

2.Thejudgmentonthequalityofproductsisrecognizedasbeingin

theeyesofthebuyer.

3.Preventionofproblemsmustbeofprimaryimportance.

.talitycosttechniquesmust IacontinuousimprovementenvIronmen,qu..n'dfsonthebuyerTheapproachthatfollowssupportscontm-

pravIeaocu·.fthe.ente'ffoI'tsItrecoanizesthatbuyerperceptlOnsorm

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preventproblemsthataffectthebuyer.

ChapterFive 142

Afarmorepositiveapproachistousesupplierqualitycoststoidentifyneededsupplierqualityimprovements.Thebuyingcompanycantheniniti­ateprojectsjointlywithsupplierstores01vetheproblemsthatarethesourceofhighqualitycosts.Perhapstheproblemscanbesolvedthroughbuyingcompanyactions.Maybethespecificationsareincorrect,orthesellerreallydoesn'tknowtheapplicationoftheircomponentinthetotalproduct.Ensur­ingspecificationsare.correcthelpstoassuretheprocurementofgoodparts,andalsohelpstoassurethatgoodpartsarenotwronglyrejected.

Inothercases,itmaybethattheseller'smanufacturingprocessneedsupgradingthroughbettertooling.Throughjointprojectsllsingsuppliercostsasfacts,theseproblemscanbesolved,resultinginbetterproductsandlowercoststobothparties.

Aswasdiscllssedinchapter4(page74),acompanyshouldusequal­itycostsinitssupplierrelationships.Throughthistool,thebuyingcom­panycandeterminethecostsandsuppliersonwhichtofocus.Aftermak­ingthisdetermination,thebuyingcompanycansuggesttothesesuppliersthattheyadoptaqualitycostprogram,ifappropriate,orperformspecialqualitystudiestoobtainimprovementsinthequalityoftheirproducts.However,discretionmustbeused.Smallcompaniesmaynotbeabletosupportthiseffort,andtherecanbespecialcircumstancesinothercom­paniesthatwouldprohibitasuccessfulapplication.Supplierqualitycostscanalsobeusedbythebuyingcompanyasabasisforstartingjointqual­ityimprovementprojectswithitssuppliers.

Mostimportantofallisthatanyqualitycostsprogramisincompletewithoutaneffectivecorrectiveactionprogram.Themereactofcollectingqualitycostswilldonothingforyourcompanybutaddcosts.Onlythroughpinpointingandpermanentlysolvingproblemscanacompanyprogressinimprovingqualityandproductivitywhilereducingcosts.

GAININGJUSTIFICATIONFROMCUSTOMERSATISFAaION*

Qualitycosttechniquescanbesupplementedtojustifychangesforimprov­ingcustomersatisfaction.Themonetarygaintoacompanybyhavingmoresatisfiedcustomerscanbequantified.Amoresatisfiedcustomerhasamuchgreaterwillingnesstorepurchasefromacompany.Thepayoffisagaininrepeatsalesandanaccompanyingincreaseincashflowinthefuture.

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marketingstudyofthecustomerbase.Toreducetheeffort,themarketingstudiessuggestedinStepsIand2andthisstepmaybecombinedintoonesurvey.Forthisstep,buyersareaskedtoratehowtheyfeelabouttheproductthattheyuse.Figure5.22containstheresultsofsuchastudy.Notethatonly30percentofthecu~­tomersratedtheproductgoodorbetter.Manywouldfeelthatthls

leavesalotoLroomforasignificantimprovementincustomer

satisfaction.

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Figure5.22.Buyers'currentandprojectedperceptionsofqualityafterproposedincreaseincustomersatisfaction.

Figure5.21.Profileofwhenbuyersinyear0willrepurchase. GaininContributionMargin:Cashflowfromtheincrementalgaininrevenueminusincrementalincreaseincostduetoadditionalrepeatsalesfrommoresatisfiedcustomers

Thefollowingstepsaresuggestedtocalculatethegainincontributionmarginresultingfromaprojectedincreaseinbuyersatisfaction:

1.Findtherelationshipbetweenbuyers'perceptionsofqualityand'repurchaseintentions.Thisrequiresamarketingstudyinvolvingthecurrentbuyerbase.Thebuyerschosenforthesurveyarethoselikelytoberepurchasingsoon.Buyersareaskedtoratehowtheyfeelaboutthequalityoftheproduct.Thentheyareaskediftheyarewillingtorepurchasea'similarproduct,fromthesamecompany.Figure5.20showstheresultsofsuchastudy.

2.Determinewhenrepurchasesarelikelytobemade.Formostcom~panies,repurchasesaremadeneartheendofthelifecycleoftheproduct.Thisisusuallywellbeyondthewarrantyperiod.Forsomecompanies,salesrecordsmaycontainthisinformation,but,forothercompanies,amarketingstudy_ofthecurrentcustomerbasemayberequired.Buyerswouldbeaskedwhentheyexpecttorepurchaseasimilarproduct.Figure5.21isaprofileofbuyers'repurchaseintentionsforaproduct.Allbuyersinitiallypurchasedtheproductattime"0."ItisnotedthateaGhcompanyandeachproductwithinacompanymayhave'adifferentprofile.

3.Assessthecurrentperceptionsofbuyersregardingthequalityoftheproduct.Findingthecurrentperceptionsofbuyersalsorequiresa

PayoffThepotentialmonetarygain,orpayoff,toacompanybyhavingmoresat­isfiedcustomersisoftenquitelarge.Amoresatisfiedcustomerhasamuchgreaterwillingnesstorepurchasefromacompany.However,thispayoffisnotimmediatebutsometimeinthefuture.Thisrequiresalong-rangeout­lookbyacompany.

Incontrast,thepenaltiesforlackofbuyersatisfactionaresevere.Anunhappybuyercouldtellasmanyasthirty-fiveotherpersonsabouttheproblem.Thissecondaryeffectmayhaveasevereimpactonfuturesales.

Thepayoff,ormonetarygain,toacompanyinseekingbettercus­tomersatisfactionisdefinedasfollows:

146ChapterFive

Theproductofcolumns2and3isenteredinthefourthcolumn("Adjusted%WillingtoRepurchase")afterconvertingfromnecessarypercentagestodecimals.Thetotaloftheentriesinthefourthcolumncomprisesthe"compositepercentagewillingtorepurchase."Thismeasureofthecurrentlevelofcustomersatisfactionisaweightedaverageofthedataforthevariousperceptions.Table5.4showsthatonly29.4percentofthebuyersarecurrentlywillingtorepurchase.

6.~alculatethepercentofbuyerswillingtorepurchaseunderthepro­Jectedlevelsofcustomersatisfaction.AsimilarcalculationcanbemadefortheprojectedlevelsofcustomersatisfactionandisshowninTable5.5.ThesourcesofdataandthecalculationsareidenticaltothatdescribedinStep5.Themeasureoftheprojectedlevelofcustomersatisfaction(compositepercentagewillingtorepurchase)showsthat66.6percentarenowlikelytorepurchase.

4.Projectthechangeinperceptionsofqualityabouttheproducttobesoughtbymakingimprovements.Muchjudgementisrequiredastowhatlevelofsatisfactionshouldbesought.Thepayoffforacom­panyiscontingentonthesizeoftheincreaseprojected.Forexam­ple,alargerincreasewillresultinmoremonetarygainfromrepeatsales.Ontheotherhand,alargerincreasewillbemuchmorechal­lengingtoobtain.Aidinginthisjudgementisknowledgeofthecur­rentlevelofcustomersatisfactionfoundinStep3.BenchmarkingofhowbuyersfeelwhoOwncompetitiveproductsmayalsobeuse­ful.Amarketingstudyisnecessarytoprovidebenchmarksastohowcompetitorsaresatisfyingcustomers.Figure5.22alsocon­~ainstheprojectedperceptionsofqualityafteraproposedincrease~ncustomersatisfaction.Notethatcustomerperceptionsarepro­Jectedtobeonenotchupafterimprovementsaremade.

5.Calculatethepercentofbuyerswillingtorepurchaseundercurrentlevelsofcustomersatisfaction.Thecalculationofcurrentlevelsofcustomersatisfaction,intermsof"compositepercentagewillingtorepurchase,"isshowninTable5.4.Sourcesofdatainthistableare:

QualityImprovementandQualityCostReduction147

7.Calculatethegaininpercentofbuyerswillingtorepurchaseif.pr~­

jectedlevelsofcustomersatisfactionareobta~ned.The~aInIn

buyerswillingtorepurchaseisthedifferenceIIIcomposite?er­centagewillingtorepurchasefoundinStep6(66.6percent)mInUSthatfoundinStep5(29.4percent),or37.2percent.I~oth~rwords,repeatsalesfromtheprojectedincreaseinbuyersatisfactIOnmorethandoubled.

8.Calculatethegainincontributionmarginforeachyeartha~repur­chasesaremadeifprojectedlevelsofcustomersatisfactIOn.a:eobtained.Table5.6illustratesthecalculationmadefo:the?aInIncontributionmarginifprojectedlevelsofcustomersatisfactIOnareobtained.

Table5.4.CalculationofbuyerswillingtorepurchasewithCUITentlevelsofcustomersatisfaction.

Buyers'.%WillingAdjusted%WillingPerceptiontoRepurchase%ofBuyerstoRepurchase

Poora100.0Fair186010.8

Good623018.6Excellent92a0.0

Composite%29.4 willingtorepurchase100

Table5.5.Calculationofbuyerswillingtorepurchasewithproposedimprovementincustomersatisfaction.

Buyers'%WillingAdjusted%WillingPerceptiontoRepurchase%ofBuyerstoRepurchase

Poora00.0Fair18101.8

Good626037.2Excellent923027.6

Composite%10066.6 willingtorepurchase

SourceofData

Figure5.20Figure5.20Figure5.22

Label

Buyers'Perception%WillingtoRepurchase

%ofBuyers

Column

I23

148ChapterFiveQualityImprovementandQualityCostReduction149

apples"comparisonofthebenefitstothecostofmakingthenec­essarychangesrequiredinyearO.Figure5.23,showsthisrelation­ship.Eng\neeringeconomicprincip1es

3canbeusedtomakethis

calculation.Fortheexample,assuminga10percentcompound

interestfactor,thecalculationis

PresentWorth=Sum(FutureAmountxCompoundAmountFactor)

(Year2)=$35,340x.8264=$29,205(Year3)=$212,040x.7513=$159,306(Year4)=$106,020x.6830=$72,412

(Year0)=$260,923

300

5250.'=(J)

ro200 Ec0

'.;:0

150 ::J

:§c:0

100 u

.'=

.'=ru\:J

0

JustificationOver$260,000hasbeenidentifiedbythenewapproachforjustificationofchangesleadingtoimprovementofcustomersatisfaction.Thisisinadditiontothefundsthatmaybeidentifiedbytraditionalqualitycost

techniques.

Figure5.23.Gainincontributionmargin.Showspresentworthinyear0ofgainincontributionmarginthroughmorerepeatsalesinyears2-4.Additionalrepeatsalesprojectedbyproposedincreaseincustomersatisfaction.Acompoundinterestfactorof10percentwasassumed.(DonaldG.Newnan,EngineeringEconomicAnalysis,4thed.(SanJose:EngineeringPress,1991).

SalesrecordsCostaccounting

45

Theproductofcolumns2through5foreachrowisenteredinthesixthcolumn("GainTotalContributionMargin").Notethatthiscalculationrequiresconvertingnecessarypercentagestodecimals.Thepayoffforthecompanyorgainintotalcontributionmaro-inisshownforyears2through4.Thisiswhenbuyerswillmaker~pur­chases.However,investmentresulting"inbetterbuyersatisfactionwouldmostlybemadeinyearO-theyeartheproductisbuiltandsold.Forthisexample,thepayoffinmorerepeatsales,andadded~ashflow,willberealized{r:omtwotofouryearsaftertheproductIS~Ulltandsold.Thisrequiresalong-rangeoutlookonjustificationofmvestmentsforimprovedcustomersatisfaction.

9.Findthepresentworthinyear0ofgainincontributionmarginforfutureyears.Investmentstoimprovecustomersatisfactionmustmostlybemadeinyear0oftheproductlifepriortoshipping.Therefore,thepresentworthinyear0cifthebenefitslistedinTable5.6foryears2-:4mustbecalculated.Thiswillallowan"applesto

Thesourcesofdataforthecolumnsinthistableare

ColumnLabelSourceofData1YearFigure5.212%ofBuyersFigure5.213Gainin%WillingStep7

ToRepurchaseVolumeBoughtYear0ContributionMargin

$/Unit

%BuyersGainin%VolumeContributionGainTotalRepur-WillingtoBoughtMarginContribution

YearchasingRepurchaseYear0$/UnitMargin

00010021037.2200,0004.7535,34036037.2200,0004.75212,04043037.2200,0004.75106,020

Table5.6.Calculationofgainincontributionmarginduetogaininrepeatsalesthroughproposedimprovementincustomersatisfaction.

150ChapterFive

Traditionalqualitycosttechniquesmayidentifyotherfundssupport­ingchangesleadingtoimprovedcustomersatisfactionthroughreductionsconcerning

•Warrantyclaims.Thetotalcostofclaimspaidtothebuyeroruser,afteracceptance,tocoverexpenses,includingrepaircosts,suchasremovingdefectivehardwarefromasystem,orcleaningcostsduetoafoodorchemicalserviceaccident.Whereapricereductionisnegotiatedinlieuofwarranty,thevalueofthereductionshouldbecounted.

•Liabilitycosts.Company-paidcostsduetoliabilityclaims,includ­ingthecostofproductorserviceliabilityinsurance

•Penalties.Thecostofanypenaltiesincurredbecauseoflessthanfullproductorserviceperformanceachieved(asrequiredbycon­tractswithbuyersorbygovernmentrulesandregulations)

•Buyer/usergoodwill.Costsincurred,overandabovenormalsellingcosts,tobuyersoruserswhoarenotcompletelysatisfiedwiththequalityofadeliveredproductorservice,suchascostsincurredbecausebuyers'qualityexpectationsaregreaterthanwhattheyreceive

Investment

TheASQQualityCostsCommitteein1986broadenedthefocusofthedefinitionsofqualitycostsclearlybeyondmanufacturing.Thedefinitionsofcostcorrespondtotheactivitiesinthequalitysystemforproducingaproductorservice.Thisstartsinmarketingandextendsthroughtheotherfunctionsrelatingtoproductdevelopmentandproduction.Inviewofthis,qualitycostdefinitionsareusedtoshowwherepossibleinvestmentscanbemadetoupgradecustomersatisfaction.

About80percentoftheperceptionofbuyersatisfactiondependsonwhetheraproductmeetsthetrueneedsofthebuyer.Thefundsidentifiedcouldjustifyimportantimprovementsinassessingbuyerneedsandthenvalidatingthattheseneedsaremet.Improvementsmaybeinthefollow­ingqualityactivities:

•Marketing/buyer/user:Costsincurredintheaccumulationandcon­tinuedevaluationofbuyeranduserqualityneedsandperceptions

QualityImprovementandQualityCostReduction151

(includingfeedbackonreliabilityandperformance)affectingtheirsatisfactionwiththecompany'sproductorservice.Thisincludesmarketingresearch,buyer/userperceptionsurveys/clinics,andcon­tract/docmnentreview.

•Product/servicedesigndevelopment.Costsincurredtotranslatebuyeranduserneedsintoreliablequalitystandardsandrequire­mentsandmanagethequalityofnewproductorservicedevelop­mentspriortothereleaseofauthorizeddocumentationforinitialproduction.Thisincludesdesignqualityprogressreviews,designsupportactivities,productdesign-qualificationtest,andservicedesign-qualificationfieldtrials.

•Specialproductevaluations.Thisincludeslifetestingandenviron­mentalandreliabilitytestsperformedonproductionunits.

Theremaining20percentoftheperceptionofbuyersatisfactiondependsonhowacompanyhandlescomplaintsandsolvesproblems.Thefundsidentifiedcouldalsojustifydesirablechangesfortheseactivities.Thismayinclude

•Evaluationoffieldstockandspareparts.Includescostofevaluationtestingorinspectionoffieldstockresultingfromengineeringchanges,storagetime(excessiveshelflife),orothersuspectedproblems

•Complaintinvestigations/buyeroruserservice.Totalcostofinvestigating,resolving,andrespondingtoindividualbuyerorusercomplaintsorinquiries,includingnecessaryfieldservice

•Retrofitcosts.Coststomodifyorupdateproductsorfieldservicefacilitiestoanewdesignchangelevel,basedonmajorredesignduetodesigndeficiencies.

Althoughnotaqualitycost,improvementofcustomersatisfactionmayalsorequireaninvestmentinupgradingtheproductorprocessesinvolvedinmakingtheproduct.

ConclusionsRelativetothesuggestedapproachthatsupplementstraditionalqualitycosttechniques,thefollowingisconcluded:

I~.£cnaprerl'lve

Althoughmostexamplesandcasestudiesprovidedthroughoutthistextapplyequallywelltobothmanufacturingandserviceindustryorganiza­tions,theywereobtainedprimarilyfrommanufacturingconcerns.Toeventhescoreforserviceandsoftwarereaders,additionalcasestudiesobtainedfromactualserviceandsoftwaredevelopmentoperationsareincludedinthischapter.

Chapter6

Service/SoftwareCaseStudies

153

ElevenbusinessunitsofBancOneCorporationparticipatedinastudyofqualitycosts,cu,stomersatisfaction,andqualitydeficiencies/defects.Therelationshipbetweenthesethreemeasurablecomponentsofqualitywasexplored.Correlationanalysiswasperformedusingthesethreemetrics.Interestingrelationshipsemergedthatcanhelppredictwhatyouwillfindandimproveinanorganizationifeachoneofthemetricsismeasuredovertime.

Attackinghighcostofqualityopportunitiesreducescost,defects,anderrorsandsignificantlyincreasescustomersatisfaction-anddelight.Acostofqualityanalysishelpsprioritizetheopportunitiesforimprovement.Thisprioritizationprocessassuresthatthoseopportunitieswhichwillhavethebiggestimpactonthebottomlinewillbeselected.Thequalityimprovementteamprocessesusedtoattackcostofqualityopportunitieswillbediscussed(seeFigure6.1).BaneOneusesthisprocessonanongoingbasistoallocateresources,andtomotivateorassignqualityimprovementteamstoimproveopportunities.Inrecentyears,theyhaveenhancednetincomeby$20millionannuallythroughtheapplicationoftheseprocesses.

BANKING

1.QuantifyingthemonetarygaintoacompanybyhavI'namt' ."boresa1S-fiedcustomersprovIdessIglllficantJ'ustificationformakl'nal'

.bmprove-mentsaffectmgcustomersatisfaction.

2.CompaniesusingthisapproachmusthaveaIona-rangeoutlookThemonetarygainisinthefuturewhenrepurch:Sesaremadeb;buyers.

3.~uturemonetary?ainmustbeequatedtothepresenttomatchwhenlDvestmentsforImprovementswillbemadeTh'bd .'...~caneoneusmgengmeerIngeconomicsprinciples.Bydoinathisan"apItI".b,pesoappescompansoncanbemadebetweeninvestmentcostsand

expectedbenefitsormonetarygain.

4.T~~suggestedapproachexpandstraditionalcosttechniquesbypro­vldmgananalysisthatiscustomer-focused.Thistypeofanal.. w"..ySISIS~orelD-tune~IthcontIlluoUSimprovementeffortstakinaplaceIIImanycompames.b

154

Service/SoftwareCaseStudies155

IntroductionWithintheserviceindustry,aswithinmanufacturingconcerns,therearecostsassociatedwithprovidingandensuringahigh-qualityproductand/orservice,andthesecostsaredesignatedasqualitycosts.Inordertounderstandtheeconomicimpactthatqualitycostshaveonthefinancialpositionofabankandhowtheycanbeusedtoenhancethatposition,itiscrucialthatqualitycostsbedefined,measured,andanalyzedandactionbetakentomanagethem.Thefourqualitycostcategoriesofprevention,appraisal,internalfailure,andexternalfailureastheyrelatetothebank­ingindustryaredefinedasfollows:

•Prevention-Preventioncostsareproactiveactivitiesthatareaccom­plishedbeforeorduringprocessingorservicedelivery.Preventioncostsarethosecostsassociatedwithoperationsoractivitiesthatkeepfailurefromhappeningandkeepappraisalcoststoamini­mum.Examplesofpreventionactivitiesarenewproductreview,qualityplanning,qualityimprovementteammeetings,trainingpro­grams,writtenpoliciesandprocedures,analysisofqualityinforma­tion,andqualityinformation/improvementprojects.

•Appraisal-Appraisalcostsarethosecostsincurredtoprojectorpre­dictqualitylevelsandtoascertaintheconditionofaproductorser­viceinordertodetermineitsdegreeofconformancetoqualitystan­dardsorspecifications.Examplesofappraisalactivitiesareinspectionofincomingwork,suppliesandmaterial,periodicin­spection'ofworkinprocess,checking,balancing,verifying,finalinspection,shoppersurveys,customersurveys,focusgroups,andanalysisofcustomercorrespondence/complaints.

•Internalfailure-Internalfailurecostsarethosecoststhatareincurredasaresultofcorrectingtheserviceorproductsproducedthatdonotconformtostandardsorspecificationspriortodeliverytothecustomer.Examplesofinternalfailurearemachinedown­time,scrapandwasteduetoimproperlyprocessedformsorreports,andreworkofincorrectlyprocessedwork.

•Externalfailure-Externalfailurecostsarethosecoststhatareincurredasaresultofcorrectingtheserviceorproductsproducedthatdonotconformtostandardsorspecificationsafterdeliverytothecustomerorcorrectingaproductorservicethatcustomersperceive

IJU\.ALLtf/U:rUtA·

donotconformtotheirspecifiedstandard.Examplesofexternalfail­urecostsareinvestigationtime,paymentofinterestpenalties,repro­cessingofanitem,scrapduetoimproperlyprocessedorincolTectformsorreports,timespentwithdisgruntledcustomers,andlostorneveracquiredbusinessduetoprovidingpoorserviceorhavingapoorqualityreputation.

Mostappraisalandallfailurecostswereconsideredthe"costofpoorquality."Thesecostswoulddisappeariftheproductorservicewasdefectfreeorifitconformedtostandardsandspecificationsduringoratthetimeofcompletionordelivery.

Ifallfourcategoriesofqualitycostsareaddedtogether,theyarecalledtotalqualitycostsforaproduct,function,orservice.Inaggregate,thesecostsrangefrom10percentto30percentofsalesor25percentto40percentofoperatingexpense.Thelatteristhewayqualitycostsaremeasuredinbanks,astheydonothavesales.Thisrangehasbeenverifiedinbankingtimeandtimeagain.Itrepresentsatremendousopportunitytoreducecostandincreasecustomersatisfaction.

Objective

Theobjectiveofaqualitycostmeasurementistoaidacompanyindeter­miningbyfunction,byproduct,orbyproductlinewherethehighestcostsofqualityare,sothatimprovementeffortscanbetargetedthere.Thegoalshouldbetoimprovequalityandproductivityand,hence,profitabilitybyreducingqualitycosts.Revenuecanalsobeincreasedbyincreasingcus­tomersatisfaction,resultinginincreasedloyaltyandrepurchase.

Thequantitativedatafromqualitycostmeasurementsuppliesman­agementwithnecessaryinformationsothattheycanoptimizequalityimprovementresourceallocation.Highappraisalandfailurecostsalertmanagementtoproblemsthatmayhavebeenpreviouslyoverlooked.Asaresult,improvementprojectscanbeundertakenwhichreducecost,improvequality,andthereforeincreaseproductivityandprofitability.AcompanywideprogramaleJ1Stheemployeesastotheemphasisbeingplacedon~.quality.andtheirresponsibilitytomeetthecompany'squalityobjectives,:.Thecompanywidecommitmenttoqualityincreasesproductiv­ity,sinceworkthatisdonerightthefirsttimedoesnotneedtoberedone.Further,increasedproductivityandhigherprofitabilityandcustomersat­isfactions~ouldgivethecompanyabetterpositioninthecompetitivemarketplace.

Service/SoftwareCaseStudies157

GettingStartedThecompany'sspecificobjectivewilldeterminehowtheprocessistobeimplemented.However,therearebasicguidelinesthatshouldbefollowedwhenimplementingqualitycostmeasurement.Startsmall.Donotattempttoqualitycosteveryproduct,service,orfunctionwithinthecom~any.StartwithactivitiesthatyoususpectmayhavehighfailureorappraIsalcosts.Onceyouhavedecidedtheareatobemeasured,begindatacollection.

First,acompletelistofalloperationsoractivitiesorjobsisdevelopedinordertoestimatecostsbasedonactualoperatingactivityandexpense.Thelistdetailseachtaskoroperationperfonnedintheareaandthetimespentperformingeachtask.Preventionactivitiesandtimespentpe~formingthemarealsoincludedonthislist,sincetheyarepartoftotalqualItycosts.Aflowchartshouldbedevelopedtoassureallactivitiesarecapturedandtobalancelaboractivitiesandcosts.Timecanbeallocatedasapercentageoftotalavailablelabortimeordirectlyastotalhoursspent.Thelatterisrec­ommended.Totalhoursspentperformingalltasksshouldequaltotallaborhoursavailableinthearea.Ineithercase,thetotalnumberoflaborhoursavailableinanareamustbeascertainedandspecified.Theaveragesalaryleveloftheemployeesintheareamustalsobedetermined.Eachactivityisthencategorizedasaquality(intooneofthefourcategories)or~onquality

(production)activity.Oncequalityactivities,salarylevel,andtimespentperformingtheactivitieshavebeenspecified,qualitycostscanbecalculatedbymultiplyingthelabortimeforeachactivitybyth.eav~ragesalaryle:el.

Theexpensestatementisanalyzedtodetermll1eIfanyo~herdlr~ct

expensesarequalitycostitems.Ifso,theyareassignedtoaspecIficqualItycostcategory...

Examplesofotherdirectexpensesareinternalorexterna~trall1mgexpensescharged(anexampleofprevention),thepurch~se/mall1tenance

oftestequipment(anexampleofappraisal),the?estructlOnof.forms(anexampleofinternalfailure),andthepaymentofmterestpenaltle~orcus­tomerincomelostduetopoorquality(anexampleofexternalfaIlure).

Theactivitiesandtheirrelatedcosts,bycategory,arelistedonthequal­itycostreportandaretotaled(seeFigure6.2):Onlythosea~~ivitiesthat~a]]

intothefourcategoriesarelisted.Thelargestsll1gleopportUl1ltiesofapprarsalaswellasfailureareidentified.Highappraisalcostsarealsosignsofpossi­bleimprovementopportunitiesthatcanbereducedwithproperpr~ven~ion.Ifallcannotstartimmediately,aParetodiagramcanbedevelopedWIththISdatatodetelminewhichprojecttoundertakefirst(seeFigures6.3and6.4).

->InternalExternal Vl

OperationPreventionAppraisalFailureFailureTotal00

MakingaLoan2.Runacreditcheck0026.130$26.13 8.PrepareandputthruOLticketsandIlLinputsheets00248.190$248.19 9.Reviewdocuments03,013.787.840$3,021.62 10.Makedocumentcorrections,gatheradditional001,013.650$1,013.65 documentsorinformation

II.Prepareticklerfile,reviewandfollowupon0156.7500$156.75 titles,insurance,2ndmtgs.,andVCC's12.Reviewalloutput02,244.1400$2,244.14 13.Correctrejectsandincorrectoutput00425.84·0$425.84 15.Wor~associat<.jq,,:,,,itij'~eil)completecollateralreport00078.38$78.38 16.Workassociatea\vifhalercallsdealingwithany0002,481.88$2,481.88 problemsandthetime't~researchandcommunicate17.IlLsystemdowntime00519.890$519.89 18.TimespenttrainingorbeingtrainedonIlL1,366.34000$1,366.34

LoanPayment

I.Receiveandprocesspaymentsfromallsources0261.25783.750$1,045.00 2.Respondtoinquirieswhennocouponispresented00783.750$783.75 withpayments

LoanPayoff

2.Receiveandprocesspayoffandreleasedocument0013,060$13.06 4.Researchpayoffproblems0013.060$13.06TotalCostofQuality$1,366.34$5,675.92$3,835.15$2,560.25$13,437.66CostofQualityasa%ofTotalQualityCost10.17%42.24%28.54%19.05%100.00%CostofQualityasa%ofReportedSalaryExpense2.60%10.79%7.29%4.87%25.54%

Figure6.2.Qualitycostreport-installmentloans.

->Vl\0

3" '0(3<<1)

'3<1)

;:l

'".i'>owen

3" '0(3<<1)

'3<1)

;3.

160ChapterSix

Thesuccessofaqualityimprovementprojectdependsonaccuratelydiagnosingandapplyingcause-and-effectanalysistotheproblem.Thequal­itycostsdataspecifythesymptomoreffect,but,untilthecausesareknown,identified,andtested,noactionshouldbetakentocorrecttheproblem.Toattempttosolveaproblemwithoutknowingthecausecouldincreasequal­itycostsandnegatethepurposeofthequalitycostmeasurement.Havingproperlyidentifiedthecauseorcausesoftheproblem,theteamcanusetheimprovementprojecttosetgoalsandacourseofactiontocorrecttheprob­lem.Potentialsavingsbasedontheproposedcourseofactioncanthenbeestimated.Theteamcanevaluatethesuccessoftheimprovementprojectandthequalitycostprogrambymeasuringtheactualshiftorreductioninqual­itycosts,whilealsomeasuringtheinternalqualitylevelandexternalcus­tomerperceptions.Typicalimprovementactivitiesyieldedarangeof5to10:Ireturnoninvestment.Theseelevenqualityimprovementprojectsyieldedan8:1averagereturn.Besidestheteammonitoringthequalitycostchangeseffectiveattheconclusionoftheproject,continuousmeasurementshouldbedonetoassurethegainhasbeenheld.

RelationshipofCostofPoorQualitytoDefectsandCustomerSatisfactionTheresultsoftheelevenqualitycostmeasurementstudiesincludedthepercentageofqualitycoststototalexpense,theoveralldefectratefromqualitystandards,thelargestindividualqualityimprovementopportunityidentified,andtheoverallmeasureofcustomersatisfactionforeachdepartmentorservice.Whenthesemeasurementswerecorrelated,someinterestingrelationshipsoccurred.Alowpercentofpoorqualitycostsasapercentoftotalqualitycostspredictsasmallopportunityforimprove­ment.Conversely,ahighpercentageusuallypredictsalargeopportunityofimprovement.

Whendefectratesarecorrelatedtoimprovementopportunities,nei­therhighnorlowdefectratespredictimprovementopportunitiesofthesamerelativesize.Infact,alowdefectratecanoftenhidelargeindivid­ualimprovementopportunities.

Thedataindicatethatwherelargeindividualqualitycostopportunitiesexistthereisalessthenacceptablecustomerperceptionoftheservicelevelprovided.Therefore,defectratesarenotveryusefulinidentifyingorpre­dictingthelevelofqualitycostimprovementopportunities,butcustomersatisfactionlevelscanbemoreaccurateinidentifyingopportunities.

Service/SoftwareCaseStudies161

Customersurveyresultsmaybeabetterindicatorastowhichareasmaybenefitfromqualitycostmeasurementandimprovementteamefforts.Oncetheproblemhasbeenidentifiedandimproved,notonlywillthecostsavingsberealized,buttheremaybeamoredirectandpositiveimpactoncustomersatisfactionandretention.Satisfactionincreasesleadtogreaterloyaltyandrepurchases,whichleadtogreaterrevenuealongwithlowercosts,whichtogethersignificantlyincreaseprofitability.

EDUCATIONUsingCostofQualityinaUniversityEnvironment

In1992theUniversityofWesternOntariofonnedaQualityCentertodrivequalityandproductivityimprovementwithintheuniversity.Theirearlyeffortswithprocessimprovementteamswerenotassuccessfulasmanage­menthadhoped.Oneofthemajorareasthathadnotbeenaddressedwasaneffectivemeansofmeasuringtheopportunityfortheteamsandofmeasur­ingthesavingstoberealizedbytheimprovementsrecommended.

Costofquality(CoQ)hadbeenusedveryeffectivelybymanufacturingorganizationsformanyyearstoidentifyopportunitiesandtrackimprove­ments.Withtheservicesector'sincreasedinterestinqualityimprovement,CoQhasalsobeenusedasameasurementtoolfortheirprojects.ItwasfeltthatCoQhadexcellentpotentialinauniversityenvironmentaswell.

TheManagerofFinancialSystemsintheDepartmentofFinancewasconvincedofthevalueofCoQasaneffectivequalityimprovementmea­surementtool.Hevolunteeredhisdepartmentandidentifiedtwopilotpro­jects:(l)MajorEquipmentReplacementand(2)TelephoneSystemReview.Aprojectfacilitator/trainerwasassigned.

ThemajorconcernwastoensurethattheapplicationofCoQwouldbeviewedasa"managementtool,"ratherthana"financialtool".Asamanagementtool,CoQwouldenabletheprocessimprovementteamstomanagetheirimprovementefforts,whileasafinancialtoolitcouldbeseenasjustanothermethodtomonitortheemployees.

Forthepilotprojectstobesuccessful,itwasnecessarythattheapproachandmethodologybeseenasequallyimportantastheCoQmea­surementtool(seeFigure6.5).Teammembersweregivenextensivetrain­ing.Thetrainingconsistedofadisciplinedapproachtoprocessimprove­ment.Anintegratedprocessimprovementandpotentialproblem-solvingmodelwasused,supportedbyappropriatequalitytools.Inadditiontocost

162ChapterSix

Awareness

Improvementmethodologyandtools

Celebrateandrepeat

Figure6.5.Processimprovementteammethodology.

ofquality,theseincludedbrainstorming,processmapping,andthesevenbasicqualitytools:Paretodiagram,checksheet,cause-and-effectdiagram,scatterdiagram,histogram,controlchart,andrunchart.

Anotherkeyfactorinthesuccessofthepilotprojectswasmanage­ment'sroleinthesupportandguidanceoftheimprovementteams.Oneofthemostsignificantchallengesfacedbythemanagementteamwastofreeuptimefortheimprovementteammemberstoworkontheirpro­jects.Theteammembersspent25percentoftheirtimeontheirprojects.Thismeantthatpartoftheirdailyworkhadtobeoffloadedordelayed.SomeareasweremOfesuccessfulthanothersinreassigningwork.Itwasessentialthattheteamsseequalityimprovementaspartoftheirjobandnotsomethingelsetobeaddedtotheirduties.Thekeyroleoftheman­agementteamwastomonitortheprogressoftheteambyfocusingontheactivitiesorstepsoftheteam'sprocessandnottheresultsoftheteamefforts.Byensuring'theteamfollowedalltheappropriatesteps,the

.resultswouldfollow.

Service/SojtwareCaseStudies163

1.MajorEquipmentReplacementProjectThepurposeofthisfirstprojectwastodevelopaprocesswithintheFinanceDepartmentforequipmentreplacement.Equipmentincludedpersonalcom­puters,copiers,facsimile,microfiche,andmicrofilm.Theprojectwouldneedtoaddressindividualneedsassessment,training,andcommunication.TheteamconsistedofsixmembersfromtheFinancialDepartment.

Theteaminitiallydocumentedandt10wchartedthecurrentequipmentreplacementprocess.Theyfoundthatthedecisiontoreplaceequipmentwasbeingmadebyoneindividual,usingaveryinformalprocessbasedonthebestassessmentoftheneed.TheteamthenconductedcustomerfocusgroupmeetingstogatherinformationonperceptionsoftheCUITentprocess.Whatwasfoundwasthattherewasalackofcommunicationwithstaffmem~bersonthecurrentequipmentreplacementprocess,andtheexistingproceduredidnotprovidefeedbacktotheindividualsiftheirrequestforequipmentwasnotapproved.Theperceptionwasthatthecurrentmethodwasnotobjective.Inmanycases,inputfromtheindividualsrequestingtheequip­mentwasnotused.

TheteamthensurveyedasampleofmembersoftheDepartmentofFinancetodeterminethelevelofequipmentandtrainingsatisfaction.Usingtheinformationcollected,theteamwasabletoestimatethecostofqualityfortheexistingprocess.TheresultsofthisdataareshowninFig­ure6.6.Theteambasedanestimateoflossinproductivityonthelevelofdissatisfactionexpressedbythosesurveyed.Theydeterminedthenumberofindividualsusingthattypeofequipment.Asaresult,itwaspossibletocalculatetheannualCoQbymultiplyingthenumberofindividuals,timeshoursperyear,timesanaveragehourlysalaryrateof$28.TheannualCoQforequipmentwasapproximately$210,000.TheyalsocalculatedtheCoQforcomputertrainingtobeapproximately$145,000,bringingthetotalannualCoQtoalmost$355,000.

Theteamthendevelopedanequipmentreplacementprocessusingateamapproach.Thisincludedannualbudgetpreparation,repairs,reserveappropriations,andcomputertrainingtobecentralizedwithintheDepart­mentofFinance.Theythenpresentedmanagementwithalistofsevenrecommendationscompletewithimplementationcosts(seeFigure6.7).

Result.Therecommendationshadaone-timecostofapproximately$2200andanannualcostofapproximately$12,500.Thesavingsrepre­sentedapaybackperiodoflessthanonemonth.

2.TelephoneSystemReviewProjectThepurposeofthissecondprojectwastoreviewtheexistingtelephonesystemandmakerecommendationsforimprovementtomaximizecus­tomersatisfactioninacost-effectivemanner.SixmembersoftheDepart­mentofFinancevolunteeredtoparticipateonthisproject.

TheteamdevelopedatelephonesystemreviewchecklisttobetterunderstandthemagnitudeandtypesofcallsbeingmadetotheDepartmentofFinance.NexttheteamconductedacustomerfocusgrouptodeterminetheproblemsthatwerebeingexperiencedbyindividualscontactingtheDepartmentofFinance.Themostfrequentproblemsidentifiedwere

I.Callstransferredtothewrongarea

2.Incompletemessagesreceived

3.a.Pickingsamephone

b.Pickingsamephonewithdisconnect

3,564

396

$3,564

$1,400

462

352

$2,214

2,772

$10,296

$12,510

Service/SoftwareCaseSlUdies165

12meetings@3hoursfor3people@$33=

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Figure6.7.Estim.atedimplementationcosts.

Totalestimatedcostsforimplementation:Averagehourlysalaries:Nonmanagerial$281hrPMA$33Ih,­Managerial$441hr

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Result.TheCoQafterimplementationoftherecommendationswouldbeabout$18,900peryear.PartofthenewCoQincludedapproximately$1600fortraining.Thisprojectresultedinanannualsavingsofabout$46,600.

Conclusion

Thesetwopilotprojectsclearlydemonstratedthatcostofqualityisanexcellentmanagementtool.ItwasshownthatCoQcanbeusedeffectivelytoidentifyopportunitiesandtrackimprovements,notonlyinmanufactur­ingandservicesectors,butalsointheuniversitycommunity.

4.Nottellingsomeonewhenleavingtheiroffice

5.Expertnotavailablewhenimmediatehelpneeded

6.Inexperiencedortemporaryhelpansweringcalls

7.GeneralcallsgotoDirectorofFinance

8.Notusingavailableoptions

9.Secretaryclearingphonemailbox

Theteamthensummarizedthecostofqualityforthecurrentprocess(seeFigure6.8).Theyfirstdeterminedthetimeitwouldtaketocorrecttheproblemforeachofthefirstsevenproblemtypes.Forexample,thetimewastedwhenacallhadbeentransferredtothewrongareawas6.5min­utes.Forthelasttwoproblems-payingforoptionsnotusedandclearingphonemail,theycalculatedthecostofeach.Clearingphonemailvariedfromdepartmenttodepartment,dependingonwhowasinvolvedandthenumberofmessages.Basedontheinformationcollectedthroughthechecklist,theythencalculatedtheCoQforeachtypeofproblem.Again,thesevariedincostfromareatoarea,dependingonfrequencyoferrors.ThetotalCoQfortheTelephoneSystemsReviewprojectwasapproxi­mately$65,500peryear.

Theteamthendevelopedanemployeetelephonesurveytosolicitinputfromtheusersonsuggestionsforimprovement.Usinginputfromtheircustomers,theteamdevelopedrecommendationsinelevenareas.Thecostofqualitywasrecalculated,basedontheserecommendations(seeFigure6.9).

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Service/S(~ttwareCaseStudies169

RESandItsImprovementProgramRaytheonElectronicSystems(previouslytheRaytheonEquipmentDivi­sion)buildsreal-time,mission-critical,embeddedsoftwaresystemsundercontracttodefenseandcommercialcustomers.Itbuildsthesesystemsinthedomainsofairtrafficcontrol,vesseltrafficmanagement,digitalcommuni­cations,groundandshipboardradar,satellitecommunications,underseawarfare,militarycommandandcontrol,andcombattraining.Thesystemsitbuildsarelargeandtypicallyrangeinsizefrom70-500KDSI(thousand

deliveredsourceinstructions).Since1988REShasbeenengagedinasoftwareimprovementinitia­

tivewhichwasdrivenbytheneedtoovercomeoverrunningschedulesandbudgets,andthecrisis-drivenenvironmentthatresulted.Subsequently,oncebudgetsandschedulescameundersomecontrol,itturneditsatten­

tiontothegoalofreducingrework.

SOFTWAREDEVELOPMENTCostofSoftwareQuality(CoSQ)atRaytheon's

ElectronicSystems(RES)Group

IntroductionTheintentofthiscasestudyistoprovidevisibilityintoabenchmarksoft­waredevelopmentorganizationthatcurrentlyusesCoSQtodocumenttheresultsofitsimprovementprogram,andtoobservehowCoSQconceptsrelatetotheconsistentproductionofhigh-qualitysoftware.TheRaytheonElectronicSystems(RES)organizationwaschosenasacasestudysubjectbecause,usingaCoSQapproach,itwasabletoshowspecific,measuredbenefitsfromitssoftwareimprovementefforts.Moreover,thegroupcol­lecteddataandlessonslearnedaboutitsCoSQimplementationactivities.SeethediscussionofRESCoSQactivitiesinChapter4'ssectiononSoft­

wareQualityCosts.AlthoughRESisinthecontractsystemsbusiness,itaresimilarinmany

waystothecommercialsoftwaresupplierwhowantstoachieveasuccessfulandprofitablebusinessbysatisfyingcustomerswithahigh-qualitysoftware(orsystem)productdeliveredontimeandwithinbudget.AlthoughtherearemanyreasonstouseCoQinanorganization,RESusedittomeasureanddemonstratetheeffectsofitsongoingsoftwareimprovementprogram.Specifically,CoSQwasusedtoshowthecostsandbenefitsofitsinvestmentsoverthechronologyofitsimprovementprogram.ThisisagoodexampleofthewayinwhichafewleadingorganizationsareusingCoSQtoday

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Reworkcosts

•Fixingdefects•Fixingcode•Retests•Re-reviews•Correctingdocs•Changecontrol•Externalfailures

•SWengr.initiative

Preventioncosts

Costofquality

/\ CostofCostofconformancenonconformance

•SQAactivities•Audits•Reviews,walkthroughs,

andinspections•First-timetesting

/ Appraisalcosts

Figure6.10.RES'sCoSQmodel.

cometoacceptmountainsofreworkaspartoftheireverydayac~ivities-insomecasestheydonotthinkofitasrework.Forexample,preCIOUSsched-

,d'rlu uletimeisspentonfixesforcodedefectswhensoftwareoesntpeormexpected,oronredesignofauserinterfacebecausethecusto~erexpe.ctssomethingdifferentfromwhatisprovided.Manysoftwareengmeersthmkofthisasthewaythingsaresupposedtohappen..

Thedefinitionsofeachsubcategory(withintheCoSQcategonesofappraisal,prevention,andrework)whichwere~atherbrieff?rreasonsofsimplicityweresubjecttomisinterpretation.ThISwasaddresse~byre.fin­ingthede'finitionsasexperiencewasgainedinu~ingthem.ThIS.reqUIredfiveiterationsoftheinitialdata-gatheringexerCIsebeforeasatIsfactory

levelofconsistencyofdefinitionwasobtained..Breakino-thesebasicqualitycostcategories(rework,appraIs~l,~nd

prevention)intosubcategories,definingthesubcate?ories,an~asslgnmgprojectactivitiesandcoststothemprovedtobeadifficulttaskforREr Thiswasbecausetheexistingworkbreakdownstructureus~donthesotwareprojectsdidnotcorrespondwelltotheCoSQcategones.

CoSQDataGathering.Projectcostswerecollectedus~ng.thecon::~­tionalworkbreakdownstructure,andprojectleaderspenOdlcallyn:~allyreassignedallcoststothecostofqualitysubcategories.Theprojects

Service/SoftwareCaseStudies171

CostofSoftwareQualityCoSQwaschosenasoneoffourmeasurestotrack,becauseitprovidedaframeworktodeterminereworklevels,aswellastheoverallreturnoninvestment(ROI)ofRES'simprovementprogram.Theothermeasureschosenweresoftwareproductivity,costperformanceindex,andoverallproductquality.

ThefollowingdescribeshowRESusedCoSQasamethodfortrack­ingreworkandcalculatingROIintheirsoftwareimprovementprogram.Itisadaptedfrompreviouslypublishedsources2,3,4,5

TheRESimprovementinitiativecoveredroughly350-600profes­sionals.Theinvestmentfortheinitiativehasbeensteadyatabout$1mil­lionperyear.TheSEICMM(SoftwareEngineeringInstitute-CapabilityMaturityModel)-basedapproachwaslateradoptedandusedtohelpfocusitsimprovements.Followingthisapproach,itwasself-assessedatCMMLevel1in1988,Level2in1990,andLevel3in1992,andasof1995itoperatedallnewprojectsstartingatLevel4.(ForadescriptionoftheSEICMMlevels,seeTable4.3intheSoftwareQualityCostssectionofChap­ter4.)In1995,RESwonthecovetedIEEEComputerSociety'sSoftwareProcessAchievementAward.

RES'simprovementprogramstrategyincludedadualfocusonprod­uctandprocess.Theproductfocalpointareasincludedsystemdefinition,requirementsdefinition,inspectionsandintegration,andqualificationtesting.Theprocessfocalpointareasincludeddevelopmentplanningandmanagementcontrols,training,andpathfinding.I

170ChapterSix

RES'sCoSQModel.Costofsoftwarequalitywasconsideredthesumoftwocomponents:thecostofnonconformance(reworkcosts)andthecostofconformance(preventionandappraisalcosts).RESdeterminedthattheyneededtotrackthesequalitycostcategories.ThemodelshowninFigure6.10wasusedtoaccumulatethem.

Inthismodel,CoSQisthesumofthecostsofappraisal,prevention,andrework.Thefocusonreworkisimportant,becauseitrepresentsthemajorcomponentofwasteandscrapofsoftwaredevelopment.Oneofthemostcostlyactivitiesinsoftwaredevelopmenttodayisreworkingorredoingwhathasalreadybeendone.Therearemanyunderlyingreasonswhythishappens,butmostlybecauseofflawedrequirements,changingconditions,andunexpectedproblems.Forsomereason,softwareprofessionalshave

Service/S(diwareCaseStudies173

centoftotalprojectcosts.Inthetwoyearsfollowing,thatvaluehaddroppedtoabout20percent,andthetrendwascontinu~ngdownward.In1995TCoSQwasapproximately25percentoftotalprojectcosts,andtherewo~kduetobothinternalandexternalfailureshadbeenreducedto

around6percentoftotalprojectcosts..'ReworksavingswereachievedattheexpenseofasmalllD~reaseIII

conformancecosts.Forexample,appraisalcostsrosewhenlllformalreviewswerereplacedbyformalinspections,andpreventioncostsrose

Figure6.11.TrackingthecostofsoftwarequalityatRES.

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Table6.1.CoSQtrackingatspecificpointsintime. CoSQdatawerethencombined.Theimprovementinitiativecostswerefactoredinasaseparatepreventionproject.Thesewerethenusedtopro­ducetheorganizationalCoSQaverageandtrenddata.

Long-term,plansweretodevelopacommonworkbreakdownstruc­turetoprovideascloseamappingtothecostofqualityaspossible.Thiswouldalsoentailarevisionofthecostaccountingsystemandpossiblythetimecardreportingsystemaswell.

ExperiencesandLessonsLearned

CoSQModelUsageLessons.RESencounteredanumberofexperiencesusingtheCoQmodel.Manyquestionsaroseabouthowtoallocatecoststosubcategories.Therewasquiteavariationinthemethodsusedtobreakdowntheactualcoststothedefinedcostbin.Thiswasresolvedbyrefin­ingthesubcategorydefinitionsandbyanalyzingandcomparingthesub­allocationalgorithmsusedbythesixtargetprojectleaders.Itwasneces­sarytohavetheprojectleader,ratherthananadministrator,generatethedatabecausetheprojectleaderpossessedthefirsthandknowledgeofpro­jectparticulars,aswellasgoodengineeringjudgment.

172ChapterSix

UsingtheCoSQDatatoUnderstandtheImpactofImprovement.Table6.1showstheRESdistributionoftotalprojectcostsintoCoSQcat­egories,totracktheimpactofitsimprovementprogramovertheyears.StartingatCMMLevelIin1988,RESintroduceditssoftwareprocessimprovement(SPI)program.Usingtheresultsoftrackingfifteenprojects,itachievedCMMLevel3practicesinalittleoverthreeyears.AsseeninFigure6.11,attheLevellstage,RES'sCoSQfluctuatedbetween55per­centand67percentoftotalprojectcostsand,bythetimeofreachingLevel3processmaturityin1991,itsCoSQhaddroppedtoapproximately40percentoftotalprojectcost.In1990,whenRESwasapproachingCMMLevel3,RES'stotalCoSQwasabout45percentoftotalprojectcosts,anditsratioofconformancetononconformancecostswasapprox­imately1.5.In1994,whenRESwasadoptingagoalofCMMLevel4,RES'stotalCoSQwasabout24percentoftotalprojectcosts,anditsratioofconformancetononconformancecostswasapproximately3.0.

ReworkCostSavings.Figure6.1Ialsoshowsthetrendintheaveragecostofreworkfromthestartoftheimprovementinitiative.Inthetwoyearspriortotheinitiative,thereworkcostshadaveragedabout41per-

174ChapterSix

wheninspectiontrainingwasinstituted.Also,reworkcostsassociatedwithfixingdefectsfoundduringdesignrosefromabout0.75percenttoabout2percentofprojectcost,andthoseassociatedwithfixingdefectsfounddur­ingcodingrosefromabout2.5percenttoabout4percentofprojectcost.

Them,00rreductioninreworkcostswasthatassociatedwithfixinosourcecodeproblemsfoundduringintegration,whichdroppedtoabout20percentofitsoriginalvalue.Thesecondlargestcontributortothereworkreductionwasthecostofretesting,whichdecreasedtoabouthalfitsinitial:alue.~hisclearlyindicatesthattheadditionalcostsofperformingformalII1spectlonsandthetrainingthatmustprecedeitarejustifiedonthebasisoffindingproblemsearlierintheprocess,resultinginmoreefficiency.

SoftwareQuality.TheultimatemeasureofqualityisthecontributionthatsoftwarehasmadetoRES'ssuccesswithsoftware-intensivesystems.Improvementsmadehaveenabledsuccessonseveralmajorsoftware­intensiveprogramsandhasallowedREStotacklelargersoftwarepro­jects.Thiswasconcretelydemonstratedonseveralcomplexsystempro­jectsbyremovingsoftwarefromthecriticalpath,andevendeliveringearly,thusearningincentives.TheprimaryquantitativemeasurethatRESusestoassessoverallproductqualityisthedefectdensityinthefinalsoft­wareproducts.Thisdensityfactorismeasuredasthenumberofsoftwaretroublereports(STRs)perthousandJinesofdeliveredsourceinstructions(KDSI)oneachproject.Theprojectdensitiesarecombinedtocomputeamonthlyweightedaveragetoyieldatimeplot(trendchart)oftheSoft­wareQualityLevel(STRs/KDSJ).AsshowninFigure6.12,theaveragelevelofqualityimprovedfromabout17.2STRs/KDSItoabout4STRs/KDSI,aboutafourtimesimprovement.

Productivity.Datawerecollectedfromindividualprojectsontheirpro­ductivityintermsofequivalentdeliveredsourceinstructions(EDSI)perman-monthofdevelopmenteffort.Thedatawascombinedfromallpro­jectsusingaweightingfunction,andtheresultsshowedtheaveragepro­ductivitywas,infact,increasingasafunctionoftime-meaningthatjobswerecostingless.Overall,RESachieveda170percentincreaseinsoft­wareproductivity,asmeasuredontwenty-fourprojectsoversevenyears.

Predictability.Managementneededtobereassuredthattheimprovedproductivityfigureswerebeingusedtobidnewjobs.ThisissuewasaddressedbycollectingCPI(CostPerformanceIndex)dataonthepro­ject'sbudgeted(predicted)costandactualcostatcompletion

Service/SoftwareCaseStudies175

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Figure6.12.TrackingthelevelofsoftwarequalityatRES.

CPIratio(CAC/Budget)foreachprojectwasthenusedtocomputethemonthlyweightedaverage(usingthesameapproachasthecostofqual­ity)toyieldaplotofthistime-variantmeasure.Theresultswereencour­aging,showingthatthecostperformanceindexwasimproveddramati­callyfromaboutthe20percentoverrunrangepriortothestartoftheinitiativetothe1percentto2percentrangebyearly1993.Overall,theCostPerformanceIndex(CAC/budget)wentfromabout1.43to1.00inthefirstthreeyearsandhasbeensteadyatabout1.00since.

OtherROJResults.REShaswonadditionalbusinessbasedonitsprocessmaturityresults(noamountreported).Softwarepersonnelworklessover­timethanbefore,andthishasledtolowerturnoverrates.Theoverallpay­offofitsimprovementprogramisreportedtobe7.5times(notincludinga$9.6millionscheduleincentiveawardin1991)-forexample,in1990,itspent$1.1milliononimprovementsanddeterminedthatthecostofnonconformancewasreducedby$8.2millioninthatyear.Otherleadingorganizationshaverealizedsimilarbottom-linebenefits.

6

CoSQCostsandBenefits.CoSQanalysiscostRESabout$25,000ofoverheadforthefirst-timeexercise.ItrepeatedtheCoSQanalysisexer­ciseaboutayearlaterandaddedtheanalysisprocesstothenormalseniormanagementprocessreviewsonasemi-annualbasis.

176ChapterSix

TheCoSQanalysisusedbyRESwasdeterminedtobeaviablemech­anismforthemtomeasuretheoveralleffectofsoftwareprocessimprove­ment.Itcanbeusedtoisolatesoftwarewaste/scrapandtotrytodriveittozero.Theinformationlearnedinapplyingtheapproachbenefitedtheprojectsinvolvedinthe~malysisbyprovidingearlyfeedback.Theim­provementoftheorganization'sstandardprocesswasalsofacilitated.

InstitutionalizationofCoSQTracking.By1993,afterthreeyears,thedata-gatheringexerciseforCoSQhadbecomemoreroutine.Althoughthefullanalysiswasbeingmadesemi-annually,somedepartmentmanagerswererequiringtheirprojectleaderstoprovidetheCoSQdataalongwiththeirnormalmonthlytrackingdata.Inretrospect,moreemphasiscouldhavebeenplacedontransitioningtoacommonworkbreakdownstructuregearedtothecollectionofCoSQ.

CaseStudyImplications

RES'suseoftheCoSQapproachwaspioneeringand,assuch,theylearnedmanylessonsthatothersdonothavetolearnthehardway.CoSQwasprimarilyusedasanafter-the-factmeasureofitsSPIprogram'scostandbenefits,ratherthanasatooltoguideitsSPIprogram(whichwastheCMM).ItisexpectedthatotherorganizationsusingtheCMMapproachtoSPIwillwanttodolikewise.Therefore,adetailedanalysisoftheCMMvs.CoSQwillbeneeded,sothatinvestmentopportunitiescanbebetterfocusedonhigh-impactareas.ThisanalysisshouldbefocusedontheimpactofpreventionactivitiesintheeighteenCMMkeyprocessareasoninternalandexternallyinducedrework.

RESencounteredspecificdifficultiesinthefollowingareas:

•WhenandhowtheCoSQdatawasgathered,analyzed,reported,andused

•Howthemodelclashedwithothermodelsthatwerealreadyinuse

•Thf2'IackofanexistingWorkBreakdownStructure,(WBS)withwell-definedcategoriesthatcorrespondeasilytoCoSQ

•Howthemodelwasdefinedatthedetailedlevels

•Howthemodelwasimplementedintheorganization

•HowCoSQwasusedforrootcauseanalysis

•HowthemodelwasusedtostimulateSPIandqualityimprovements

Thesedifficultiescanbeovercomewithappropriatetrainingandcoaching.

Service/SoftwareCaseStudies177

RES'suseofCoSQoccurredwithinthecontextofitscontract-orientedsystemsbusiness;therefore,theCoSQapproachwasadaptedtothespecificsofthatsituation.Amoregeneralapproachwilllikelyneedtobemodifiedforuseinothersituations,withdifferentbusinesssuccessparameters.Thesesit­

uationsinclude

•Standardproduct-orientedbusinesses

•Servicedeliverysituations

•Technology-basedstart-ups

AppendixABasicFinancialConcepts

Tounderstandtherelationshipofqualitycoststocompanycostaccount­ingsystems,itisbesttostartwithatraditionalcoststructure(seeFigureA.I).Anexplanationofthisnormaldistributionofcostsfollows.

PRIMECOSTSPrimecostsarethebasicorstandardcostsofproductmanufactureorser­viceoperations,andtheyconsistoftwoparts:

I.Directrnaterials.Rawmaterials,semifinishedproduct,andfin­ishedproduct.Theyaretobedistinguishedfromsupplies,suchastypewriterribbons,coolants,andcuttingtools,whicharecom­mittedintheoperationofthebusinessbutnotdirectlyintheend­

product:

2.Directlabor.Laborappliedtoconvertdirectmaterialsorotherinputintothefinishedproduct.Directlaborcostsarethosewhichcanbespecificallyidentifiedwithbasicproductmanufacturingorserviceoperations.Thewagesandrelatedcostsofworkerswhoassembleinputsintofinishedgoods,whooperateequipmentintegraltotheproductionprocess,orwhodealdirectlywithcustomersindeliver­ingaserviceareconsideredasdirectlaborcosts.

OVERHEADCOSTSOverheadcostsareallcostsincurredindirectsupportofprimecosts­thatis,indirectsupportofproductmanufacturingorserviceoperations.

Overheadconsistsofthreeparts:

179

Thelastrunginthetraditionalcoststructureispretaxprofit,whichissim­plythedifferencebetweenrevenuesandcostofgoodssold.

REVENUESANDPROFIT

LIndirectmalerials.Suppliesconsumedinoperationsbutnotdirectlyapartoftheend-product.Includedinthiscategoryofover­headcostsareitemssuchasprotectiveboxesformaterialhandling,packagingsupplies,perishabletools,clericalsupplies,andcom­

municationcosts.

2.IndirecllabOl:Wagesandsalariesearnedbyemployeeswhodonotworkdirectlyontheend-productorservicebutwhoseservicesaredirectlyrelatedtotheproductionprocessorserviceprovided.Includedinthiscategoryaresupervisors,operationssupportengi­neersandtechnicians,materialhandlers,storeroompersonnel,and

janitors.

3.Fixedandmiscellaneousexpenses.Depreciation,taxes,rent,war­ranties,andinsuranceontheassetsusedinoperationsareincluded

inthiscategoryofexpenses.

BasicFinancialConcepts181

COSTOFGOODSSOLD

COSTOFGOODSPRODUCED

Toarriveatthetotalcosttoacompanyofthedeliveryofproductsorser­vicestocustomers,twoadditionalareasofcostmustbeaddedtothecost

ofgoodsproduced:

I.Sellingcosts.Thosecostsincurredinanefforttoachievesalesandintransferringthecompletedproductorservicetothecustomer.Inadditiontodirectsalescosts,categoriesofcostsincludemarketing,advertising,warehousing,billing,andtransportationcosts.

2.GeneralandAdministralive(G&A)costs.Acatchallclassificationforallotherbusiness-incurredcosts.Categoriesgenerallyincludefinancial,personnel,legal,publicrelations,andinformationsystems.

Thecostofgoodsproduced,thebasicorstandardcostofproductmanufac­turingorserviceoperations,isthetotalofprimecostsandoverheadcosts.

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182AppendixA

Wecannowlookatthetraditionalcoststructureinrelationtoaqual­itycostprogram.Asignificantportionofthecostsdefinedinthequalitycostsystemwillappearinthecostofgoodsproduced.Itshouldbeclearthatanyreductioninthecostofqualityhasapositiveeffectonprofit.Thefullsignificanceofqualitycostreductionscanbeappreciatedwhenitisrealizedthatsomehighqualitycostproblemsaffectcostsinallfivecate­goriesofthecostofgoodsproduced.

MECHANICSOFQUALITYCOSTCOllEGIONThemethodofaccumulatingcostsinagoingconcernrequiressomebasicsegregationwithinthetraditionalcoststructure.Thechartofaccountsdefinesingreaterdetailthecostsincurredinthetotaloperation.Thenum­berofaccountsinthechartofaccounts,aswellasaccountdescriptions,varyfromcompanytocompany.Allaredeveloped,however,tosuittheneedsofthatparticularconcern.Asignificantportionofthecostsinaqualitycostprogramarealreadyidentifiedasaresultofpreviousrequire­mentsforotherpurposes.Somedetailscanbefoundinthechartofaccounts.Generally,joborders,workorders,orothersimilarsystemsareusedtofurtherdefinecostswithinaccounts.

Aqualitycostprogramidentifiesaportionofthefinancialstructureinaslightlydifferentmannerthandotraditionalfinancialmethods.Itcon­centratesinareaswhereexpensesarenecessarybecausetheorganizationisnotabletooperateat100percentperformancetostandard.Itisadvis­abletousethesamenomenclaturethatpresentfinancialdocumentscarrywheneverpossible.Useaccountdescriptionsfromthechartofaccounts,unitordepartmentnames,productlinenomenclature,andanyothersourceofterminologythatwilllenditselftotheunderstandingofqualityperformancethroughoutthecompany.

Theaccountingcycleandcostingprocedurebeginswiththerecord­ingoforiginalbusinesstransactionsandproceedstothefinalpreparationandsummarizingofBalanceSheetsandProfitandLoss(P&L)State­ments.Asdailybusinesstransactionsoccur,theyarerecordedinajour­nal.Forthetypicalbusiness,manytypesofjournalsabound,includingcash,sales,purchase,andgeneraljournals.Theledgeristhenextstep.Postingisthetermusuallyappliedtothisprocess.Periodically,thefinan­cialconditionoftheconcernisstatedontheBalanceSheetandtheresultsofoperationontheP&LStatement.Thesearepreparedfromledger

BasicFinancia!Concepts183

accounts.TheBalanceSheetshowsthefinancialhealthofthebusinessataparticulardate,whiletheP&LStatementisarecordofthefinancialgainorlossduringaperiodoftime.

GENERALACCOUNTINGPRAGICESTherulesandconventionsofaccountingarecommonlyreferredtoas"principles."Thetermprincipleisusedheretomean"agenerallaworruleadoptedasaguidetoaction;asettledgroundruleorbasisofconductorpractice."Thisdefinitiondescribesaprincipleasagenerallaworruletobeusedasaguidetoaction;accountingprinciplesdonotprescribeexactlyhoweacheventoccurringinabusinessshouldberecorded.Con­sequently,thereareagreatmanyactivitiesintheaccountingpracticethatdifferfromonecompanytoanother.Differencesreflectthefactthattheaccountanthasconsiderablelatitudewithinthe"generallyacceptedaccountingprinciples"inwhichtoexpresstheirownideasastothebestwayofrecordingandreportingaspecificevent.

Accountingprinciplesareman-made.Unliketheprinciplesofmathe­matics,physics,chemistry,andtheothernaturalsciences,accountingprincipleswerenotdeducedfrombasicaxioms,noristheirvalidityveri­fiablebyobservationandexperiment.Instead,theyhaveevolvedbythefollowingprocess:(1)aproblemisrecognized;(2)someoneworksoutagoodsolutiontothisproblem;(3)ifotherpeopleagreethatthisisagoodsolutiontothisproblem,itsuseisgraduallyaccepted;and(4)itthenbecomesanaccountingprinciple.Moreover,somepreviouslyacceptedprinciplesfallfromfavorwiththepassageoftime.Thisevolutionaryprocessiscontinuous.

THEBALANCESHEETResourcesownedbyabusinessarecalledassets.Theclaimsofvariouspartiesagainsttheseassetsarecalledequities.Therearetwotypes?fequities:(1)liabilities,whicharethe~laimsofcreditors-:-that.IS,

everyoneotherthantheownersofthebusll1ess;and(2)ownerseqLllty,whichistheclaimoftheownersonthebusiness.Sinceallassetsofabusinessareclaimedbysomeone(eitherbyownersorbysomeoutsideparty),andsincethetotaloftheseclaimscannotexceedtheamoun~ofassetstobeclaimed,itfollowsthatassetsequalliabilities.Accountll1g

$10,000$20,000

;;t•.

10'1-flppenmXII

systemsaresetupinsuchawaythatarec'd'df «01ISmaeotwoaspectsofeac~,eventthataffectstheserecords-changesinassetsandchanaes'eqUIties,(b'111

Let'sassumeamallstartsabLIS'bd'. ,,(,messYeposltma$20000fh'fundsInabankaccount.ThedualaspectofthO,',bI'0,IS

•<ISactIonIStlatthebusmessnowhasanassetIntheformof$20000incashandthh,"againstthisassetalsoof$20,000,'(,,<eownerasaclaun

Assets(cash)$20,000=Equities(owner's)$20,000

Ifthe~usinessthenborrows$10,000fromabankthef.I,.wouldlI1dicate'..'.'lI1ancJarecO!dsI'a'~nll1CleaseIncash,makll1gtheamount$30,000anda

c.aBnaball1stthiScashbythebankintheamountof$10000ThfiCIaIrecords(BalanceSheet)wouldshowthefollowina".eman-

b'

Cash$30,000Owedtobank

Owner'sequityTotalassets$30000'T'I..

,jotaeqUities$30,000

EveryeventaffectsbothsidesoftheBalanceSheetthusthetel'mdhIentrysystem,'oue

righ~~~r~~~~~f~~li~ti~gassetson,thelefthan~sideandequitiesontherighthandsideofth:B~anceSShheetIScomm?n111theUnitedStates.TheSource"aanceeetmaybeviewedasadescriptionofthed"s.ofC~PItalwith.whichitoperates,andthelefthandsideasad::~.JlPtlon0theformInwhichthatcapitalisinvestedonaspecified

Assetsarevaluableresourcesownedbb',atameasurable''"yaUSll1esswhichwereacquiredtheb'.moneycos,t.Lla?I!ltJesaretheclaimsofoutsidersaaainst

clal'mUsslonfesths,andtheownerseqlJltysectionoftheBalanceSheetshO\~sthe<eownersThe0''.

resultsofprofitableo~eration~n:~~;qUltymcr~asesthr?ughearnings(the

theformofdividends.ecreaseswenearnmgsarepaidoutin

Usefulinformationmaybb'dfBalanceSheetsCompf~0

1tameromtheanalysisofsucceeding

trendofthesa~eitara;veaan~eSheetanalysisisthestudyofthemoreBalanceSheet:

ms,broUPSofIt~ms,orcomputeditemsintwoor

C..ofthesamebusmessenterpriseondifferentdatesomparatlveanalYSISportraysthetrendsofpafIf"

nessenterprise,suchasliquidityanddebt/equit~I~:ti~:.eaturesofabusI-

THEPROFITANDLOSSSTATEMENTTheaccountingreportthatsummarizesrevenueitems,expenseitems,andthedifferencebetweenthemforanaccountingperiodiscalledtheProfitandLoss(P&L)Statement,orsometimestheIncomeandExpenseState­ment.TheinformationontheP&LStatementisusuallymoreimportantthaninformationontheBalanceSheet,becauseitreportstheresultsofcurrentoperations.

Likeanyaccountingreport,theP&LStatementshouldbepreparedintheformmostusefultothosewhouseit,andtowhateverlevelofdetailisrequired.Nospecificformatisused,butthefollowingbasiccategoriesofcostarefoundonmostP&LStatements:

I,Sales.Thetotalinvoicepriceofgoodsdeliveredtocustomerspluscashsalesmadeduringtheperiodequalsgrosssales.Thesalesvalueofgoodsrejectedbycustomersandcreditgivenbecausegoodswerenotasspecifiedareidentifiedseparatelyandnettedoutofgrosssalestoprovideactual(net)sales,

2.CostofGoodsSold.Thisitemisdescribedaspartofthetraditionalcoststructure,Itincludesthecostofgoodsproduced,sellingcosts,andG&Acosts,

3.GrossProfit.Thedifferencebetweennetsalesandcostofgoodssold

4.SellingExpenses.Thecostofsellingthegoodsproduced

5.NetProfit.,Thedifferencebetweengrossprofitandsellingexpenses,sometimescalledoperatingprofit

6.ProvisionsforIncomeTax.Estimatedliabilityforfederalincometax

7.NetIncome,Netgainorloss,whichisdeterminedbysubtractingprovisionsforincometaxfromprofitbeforeincometax

Thetraditionalcoststructure,previouslydiscussed,relateswelltotheP&LStatement.Theareaofconcentrationofaqualitycostprogramfocusesonthecostofgoodsproduced.Qualitycostreductionscanin­creaseprofitsorpermitareductioninpricewhilemaintainingaconstantprofit.TheP&LStatementwillalwaysreflectreducedcostsofgoodssoldwithacOlTespondingincreaseingrossprofit-theessenceofqualitycostprogramobjectives.

AppendixBDetailedDescriptionofQuality

CostElements

Forfuturereferenceanduse,detailedqualitycostelementsare.identi­fiedinnumericalsequence(seeFigureE.lforsummary).Noteveryelementisapplicabletoallbusinesses.Itisuptothereadertodeter­mineapplicabilityineachcase.Thislistisnotmeanttocontaineveryelementofqualitycostapplicabletoeverybusiness.Itisintendedtogivethereaderageneralideaofwhattypeofelementsarecontainedwithineachcostcategorytohelpindecidingindividualclassificationsforactualuse.Ifasignificantcostexiststhatfitsanypartofthegen­eraldescriptionofthequalitycostelement,itshouldbeused.Inmanycases,activitiesinvolvepersonnelfromoneormoredepartments.Noattemptismadetodefineappropriatedepartments,sinceeachcompanyisorganizeddifferently.

1.0PREVENTIONCOSTSThecostsofallactivitiesspecificallydesignedtopreventpoorqualityinproductsorservices.

1.1Marketing/CustomerlUserCostsincurredintheaccumulationandcontinuedevaluationofcustomeranduserqualityneedsandperceptions(includingfeedbackonreliabilityandperformance)affectingtheirsatisfac­tionwiththecompany'sproductorservice.

1.1.1MarketingResearchThecostofthatportionofmarketingresearchdevotedtothedeterminationofcustomeranduserqualityneeds-attributesoftheproductorservicethatprovideahighdegreeofsatisfaction.

187

FigureB.l.Detailedqualitycostelementsummary.

......0000

1.01.11.1.11.1.21.1.31.21.2.11.2.21.2.31.2.41.2.51.31.3.11.3.21.3.31.3.41.41.4.11.4.21.4.2.1

1.4.31.4.41.4.51.51.5.11.5.21.5.31.5.41.5.51.5.61.5.71.6

PREVENTIONCOSTSMarketing/CustomerlUserMarketingResearchCustomerlUserPerceptionSurveys/ClinicsContract/DocumentReviewProduct/Service/DesignDevelopmentDesignQualityProgressReviewsDesignSupportActivitiesProductDesignQualificationTestServiceDesign-QualifiCationFieldTrialsPurchasingPreventionCostsSupplierReviewsSupplierRatingPurchaseOrderTechDataReviewsSupplierQualityPlanningOperations(ManufacturingorService)PreventionCostsOperationsProcessValidationOperationsQualityPlanningDesignandDevelopmentofQualityMeasurementandControlEquipmentOperationsSupportQualityPlanningOperatorQualityEducationOperatorSPClProcessControlQualityAdministrationAdministrativeSalariesAdministrativeExpensesQualityProgramPlanningQualityPerformanceReportingQualityEducationQualityImprovementQualitySystemAuditsOtherPreventionCosts

2.02.12.U2.1.22.1.32.1.42.22.2.12.2.1.12.2.1.22.2.1.32.2.22.2.32.2.42.2.52.2.62.2.6.12.2.6.22.2.6.32.2.72.32.3.12.3.22.3.32.42.5

APPRAISALCOSTSPurchasingAppraisalCostsReceivingorIncomingInspectionsandTestsMeasurementEquipmentQualificationofSupplierProductSourceInspectionandControlProgramsOperations(ManufacturingorService)AppraisalCostsPlannedOperationsInspections,Tests,AuditsCheckingLaborProductorServiceQualityAuditsInspectionandTestMaterialsSet-UpInspectionsandTestsSpecialTests(Manufacturing)ProcessControlMeasurementsLaboratorySupportMeasurement(InspectionandTest)EquipmentDepreciationAllowancesMeasurementEquipmentExpensesMaintenanceandCalibrationLaborOutsideEndorsementsandCertificationsExternalAppraisalCostsFieldPerformanceEvaluationSpecialProductEvaluationsEvaluationofFieldStockandSparePartsReviewofTestandInspectionDataMiscellaneousQualityEvaluations

3.03.13.1.13.1.23.1.33.1.43.23.2.13.2.23.2.33.2.43.2.53.33.3.13.3.1.13.3.1.23.3.1.33.3.1.43.3.23.3.2.13.3.2.23.3.33.3.43.3.53.3.63.3.73.4

INTERNALFAILURECOSTSProduct/ServiceDesignFailureCosts(Internal)DesignCorrectiveActionReworkDuetoDesignChangesScrapDuetoDesignChangesProductionLiaisonCostsPurchasingFailureCostsPurchasedMaterialRejectDispositionCostsPurchasedMaterialReplacementCostsSupplierCOlTectiveActionReworkofSupplierRejectsUncontrolledMaterialLossesOperations(ProductorService)FailureCostsMaterialReviewandCOlTectiveActionCostsDispositionCosts..TroubleshootingorFailureAnalySISCosts(OperatIOns)InvestigationSupportCostsOperationsCorrectiveActionOperationsReworkandRepairCostsReworkRepairReinspection/RetestCostsExtraOperationsScrapCosts(Operations)DowngradedEnd-ProductorServiceInternalFailureLaborLossesOtherInternalFailureCosts

4.04.14.24.34.3.14.44.54.64.74.84.9

EXTERNALFAILURECOSTSComplaintInvestigations/CustomerorUserServiceReturnedGoodsRetrofitCostsRecallCostsWalTantyClaimsLiabilityCostsPenaltiesCustomer/UserGoodwillLostSalesOtherExternalFailureCosts

......00\.0

FigureB.l.(continued).

1.1.2

190AppendixB

Customer/UserPerceptionSurveys/ClinicsThecostofprogramsdesignedtocommunicatewithcustomers/usersfortheexpressedpurposeofdeterminingtheirperceptionofproductorservicequalityasdeliveredandused,fromtheviewpointoftheirexpectationsandneedsrelativetocompetitiveofferings.

1.1.3Contract/DocumentReviewCostsincurredinthereviewandevaluationofcustomercon­tractsorotherdocumentsaffectingactualproductorservicerequirements(suchasapplicableindustrystandards,governmentregulations,orcustomerinternalspecifications)todeterminethecompany'scapabilitytomeetthestatedrequirements,priortoacceptanceofthecustomer'sterms.

1.2ProductiService/DesignDevelopment.Costsincurredtotranslatecustomeranduserneedsintoreliablequalitystandardsandrequirementsandtomanagethequalityofnewproductorservicedevelopmentspriortothereleaseofauthorizeddocumentationforinitialproduction.Thesecostsarenormallyplannedandbudgetedandareappliedtomajordesignchangesaswell.

1.2.1DesignQualityProgressReviewsThetotalcost,includingplanning,ofinterimandfinaldesignprogressreviews,conductedtomaximizeconformanceofprod­uctorservicedesigntocustomeroruserneedswithregardtofunction,configuration,reliability,safety,produceability,unitcost,and,asapplicable,serviceability,interchangeability,andmaintainability.Theseformalreviewswilloccurpriortoreleaseofdesigndocumentsforfabricationofprototypeunitsorstartoftrialproduction.

1.2.2DesignSupportActivitiesThetotalcostofallactivitiesspecificallyrequiredtoprovidetan­giblequalitysuppOliinputstotheproductorservicedevelopmenteffort.Asapplicable,designsupportactivitiesincludedesigndoc­umentcheckingtoassureconformancetointernaldesignstan­dards;selectionanddesignqualificationofcomponentsand/ormatelialsrequiredasanintegralpartoftheend-productorservice;

1.2.3

1.2.4

1.2.5

DetailedDescriptionofQualityCostElements191

riskanalysesforthesafeuseofend-productorservice;produce­abilitystudiestoassureeconomicproductioncapability;maintain­abilityorserviceabilityanalyses;reliabilityassuranceactivities,suchasfailuremodeandeffectsanalysisandreliabilityappOliion­ment;analysisofcustomermisuseandabusepotential;andprepa­rationofanoverallqualitymanagementplan.

ProductDesignQualificationTestCostsincun-edintheplanningandconductofthequalificationtest­ingofnewproductsandmajorchangestoexistingproducts.Includescostsfortheinspectionandtestofasufficientquantityofqualificationunitsunderambientconditionsandtheextremesofenvironmentalparameters(worstcaseconditions).Qualificationinspectionsandtestsareconductedtoverifythatallproductdesignrequirementshavebeenmetor,whenfailuresoccur,toclearlyidentifywhereredesigneffortsarerequired.QualificationtestingisperfOlmedonprototypeunits,pilotruns,orasampleoftheinitialproductionrunofnewproducts.(Somesourcesconsiderthisan

appraisalcost.)

ServiceDesign-QualificationCostsincurredinthequalificationoroverallprocessprovingofnewserviceofferingsandmajorchangestoexistingofferings_Involvesplanningforandperformingapilotortrialrunusingprototypeorfirstproductionsuppliesasrequired.Includesde­tailedmeasurementsorobservationsofeachaspectoftheser­viceofferingundernormalandworstcaseconditions,forasuf­ficientquantityofunitsortimeasapplicable,toverifyconsistentconformancetorequirements,ortoidentifywhereredesigneffortsarerequired.(Somesourcesconsiderthisanappraisal

cost.)

FieldTrialsThecostsofplannedobservationsandevaluationofend-productperformanceintrialsituations-usuallydonewiththecoopera­tionofloyalcustomersbutalsoincludessalesintotestmarkets.Atthisstageofproductorservicelife,acompanyneedstoknowmuchmorethan"Diditwork?"or"Diditsell?"(Somesources

considerthisanappraisalcost.)

192AppendixB

1.3PurchasingPreventionCostsCostsincurredtoassureconformancetorequirementsofsup­plierparts,materials,orprocessesandtominimizetheimpactofsuppliernonconformanccsonthequalityofdeliveredproductsorservices.Involvesactivitiespriortoandafterfinalizationofpurchaseordercommitments.

1.3.1SupplierReviewsThetotalcostofsurveystoreviewandevaluateindividualsup­pliers'capabilitiestomeetcompanyqualityrequirements.Usu­allyconductedbyateamofqualifiedcompanyrepresentativesfromaffecteddepartments.Canbeconductedperiodicallyforlong-termassociations.

1.3.2SupplierRatingThecostofdevelopingandmaintaining,asapplicable,asystemtoascertaineachsupplier'scontinuedacceptabilityforfuturebusiness.Thisratingsystemisbasedonactualsupplierperfor­mancetoestablishedrequirements,isperiodicallyanalyzed,andisgivenaquantitativeorqualitativerating.

1.3.3PurchaseOrderTechDataReviewsThecostforreviewsofpurchaseordertechnicaldata(usuallybyotherthanpurchasingpersonnel)toassureitsabilitytoclearlyandcompletelycommunicateaccuratetechnicalandqualityrequirementstosuppliers.

1.3.4SupplierQualityPlanningThetotalcostofplanningfortheincomingandsourceinspectionsandtestsnecessarytodetermineacceptanceofsupplierproducts.Includesthepreparationofnecessarydocumentsanddevelopmentcostsfornewlyrequiredinspectionandtestequipment.

1.4Operations(ManufacturingorService)PreventionCostsCostsincurredinassuringthecapabilityandreadinessofopera­tionstomeetqualitystandardsandrequirements;qualitycontrolplanningforallproductionactivities;andthequalityeducationofoperatingpersonnel.

1.4.1OperationsProcessValidationThecos.tofactivitiesestablishedforthepurposeofassuringthecapabilityofnewproductionmethods,processes,equipment,

DetailedDescriptioJl(if'QualityCostElements193

machinery,andtoolstoinitiallyandconsistentlyperformwithinrequiredlimits.

1.4.2OperationsQualityPlanningThetotalcostfordevelopmentofnecessaryproductorserviceinspection,test,andauditprocedures;appraisaldocumentationsystem;andworkmanshiporappearancestandardstoassurethecontinuedachievementofacceptablequalityresults.Alsoincludestotaldesignanddevelopmentcostsforneworspecialmeasurementandcontroltechniques,gages,andequipment.

1.4.2.1DesignandDevelopmentofQualityMeasurementandControlEquipment.Thecostoftestequipmentengineers,planners,anddesigners;gageengineers;andinspectionequipmentengineers,planners,

anddesigners.

1.4.3OperationsSupportQualityPlanningThetotalcostofqualitycontrolplanningforallactlVltlesrequiredtoprovidetangiblequalitysupporttotheproductionprocess.Asapplicable,theseproductionsupportactivitiesinclude,butarenotlimitedto,preparationofspecificationsandtheconstructionorpurchaseofnewproductionequipment;preparationofoperatorinstructions;schedulingandcontrolplansforproductionsupplies;laboratoryanalysissupport;dataprocessingsupport;andclericalsupport.

1.4.4OperatorQualityEducationCostsincurredinthedevelopmentandconductofformalopera­tortrainingprogramsfortheexpressedpurposeofpreventingerrors-programsthatemphasizethevalueofqualityandtherolethateachoperatorplaysinitsachievement.Thisincludesoperatortrainingprogramsinsuchsubjectsasstatisticalqualitycontrol,processcontrol,qualitycircles,andproblem-solvingtechniques.Thisitemisnotintendedtoincludeanyportionofbasicapprenticeorskilltrainingnecessarytobequalifiedforanindividualassignmentwithinacompany.

1.4.5OperatorSPCfProcessControlCostsincurredforeducationtoimplementprogram.

194Appelldix13

1.5QualityAdministrationCostsincurredintheoveralladministrationofthequalityman­agementfunction.

1.5.1AdministrativeSalariesCompensationcostsforallqualityfunctionpersonnel(suchasmanagersanddirectors,supervisors,andclerical)whosedutiesare100percentadministrative.

1.5.2AdministrativeExpensesAllothercostsandexpenseschargedtoorallocatedtothequal­itymanagementfunctionnotspecificallycoveredelsewhereinthissystem(suchasheat,light,andtelephone).

1.5.3QualityProgramPlanningThecostofquality(procedure)manualdevelopmentandmain­tenance,inputstoproposals,qualityrecordkeeping,strategicplanning,andbudgetcontrol.

1.5.4QualityPerformanceReportingCostsincurredinqualityperformancedatacollection,compila­tion,analysis,andissuanceinreportformsdesignedtopromotethecontinuedimprovementofqualityperformance.Qualitycostreportingwouldbeincludedinthiscategory.

1.5.5QualityEducationCostsincurredintheinitial(newemployeeindoctrination)andcontinuedqualityeducationofallcompanyfunctionsthatcanaffectthequalityofproductorserviceasdeliveredtocus­tomers.Qualityeducationprogramsemphasizethevalueofqualityperformanceandtherolethateachfunctionplaysinitsachievement.

1.5.6QualityImprovementCostsincurredinthedevelopmentandconductofcompanywidequalityimprovementprograms,designedtopromoteawarenessofimprovementopportunitiesandtoprovideuniqueindividualopportunitiesforparticipationandcontributions.

1.5.7QualitySystemAuditsThecostofauditsperformedtoobserveandevaluatetheoveralleffectivenessofthequalitymanagementsystemclndprocedures.Oftenaccomplishedbyateamofmanagementpersonnel.Audit­ingofproductisanappraisalcost.(See2.2.1.)

DetailedDescriptionofQualityCostElc/nellls195

1.6OtherPreventionCostsRepresentsallotherexpensesofthequalitysystem,notprevi­ouslycovered,specificallydesignedtopreventpoorqualityofproductorservice.

2.0APPRAISALCOSTSThecostsassociatedwithmeasuring,evaluating,orauditingproductsorservicestoassureconformancetoqualitystandardsandperformancerequirements.

2.1PurchasingAppraisalCostsPurchasingappraisalcostsgenerallycanbeconsideredasthecostsincurredfortheinspectionand/ortestofpurchasedsup­pliesorservicestodetermineacceptabilityforuse.Theseactiv­itiescanbeperformedaspartofareceivinginspectionfunctionorasasourceinspectionatthesupplier'sfacility.

2.1.1ReceivingorIncomingInspectionsandTestsTotalcostsforallnormalorroutineinspectionand/ortestofpur­chasedmaterials,products,andservices.Thesecostsrepresentthebaselinecostsofpurchasedgoodsappraisalasacontinuingpartofanormalreceivinginspectionfunction.

2.1.2MeasurementEquipmentThecostofacquisition(depreciationorexpensecosts),calibra­tion,andmaintenanceofmeasurementequipment,instruments,andgagesusedforappraisalofpurchasedsupplies.

2.1.3QualificationofSupplierProductThecostofadditionalinspectionsortests(includingenvironmen­taltests)periodicallyrequiredtoqualifytheuseofproductionquantitiesofpurchasedgoods.Thesecostsareusuallyone-timecosts,buttheymayberepeatedduringmultiyearproductionsitu­ations.Thefollowingaretypicalapplications:a.Firstarticleinspection(detailedinspectionandworstcase

tests)onasampleofthefirstproductionbuyofnewcompo­nentsmaterials,orservices

b.First;lrticleinspectionforsecondandthirdsourcesofprevi-ouslyqualifiedend-productkeycomponents.

c.Firstarticleinspectionoftheinitialsupplyofcustomer-furnished

partsormaterialsd.Firstarticleinspectionoftheinitialpurchasedquantityof

goodsforresale

196AppendixB

2.1.4SourceInspectionandControlProgramsAllcompany-incurredcosts(includingtravel)fortheconductofanyoftheactivitiesdescribedin2.1.1and2.1.3atthesup­plier'splantoratanindependenttestlaboratory.Thisitemwillnormallyincludeallappraisalcostsassociatedwithdirectship­mentsfromsuppliertothecustomer,salesoffice,orinstalla­tionsite.

2.2Operations(ManufacturingorService)AppraisalCostsOperationsappraisalcostsgeneraIJycanbeconsideredasthecostsincurredfortheinspections,tests,orauditsrequiredtodetermineandassuretheacceptabilityofaproductorservicetocontinueintoeachdiscretestepintheoperationsplanfromstartofproductiontodelivery.Ineachcasewheremateriallossesareanintegralpartoftheappraisaloperation,suchasmachineset­uppiecesordestructivetesting,thecostofthelossesistobeincluded.

2.2.1PlannedOperations,Inspections,Tests,AuditsThecostofallplannedinspections,tests,andauditsconductedonaproductorserviceatselectedpointsorworkareasthrough­outtheoveralloperationsprocess,includingthepointoffinalproductorserviceacceptance.Alsoincludesthetotalcostofanydestructivetestsamplesrequired.Thisisthebaselineoperationsappraisalcost.Itdoesnotincludethecostoftroubleshootinab'

rework,repair,orthesortingofrejectedlots,allofwhicharede-finedasfailurecosts.

2.2.1.1CheckingLaborWorkperformedbyindividualsotherthaninspectorsasin­process.evaluation.Typically,partofaproductionoperator'sjob.

2.2.1.2ProductorServiceQualityAuditsPersonnelexpenseasaresultofperformingqualityauditsonin­processorfinishedproductsorservices.

2.2.1.3InspectionandTestMaterialsMaterialsconsumedordestroyedincontrolofquality,suchasbytear-downinspections,over-voltagestressing,droptesting,orlifetesting.

DetailedDescriptionofQualityCostElements197

2.2.2Set-UpInspectionsandTestsThecostofallset-uporfirstpieceinspectionsandtestsusedtoassurethateachcombinationofmachineandtoolisproperlyadjustedtoproduceacceptableproductsbeforethestartofeachproductionlot,orthatserviceprocessingequipment(includingacceptanceandtestdevices)isacceptableforthestartofanewday,shift,orothertimeperiod.

2.2.3SpecialTests(Manufacturing)Thecostofallnonroutineinspectionsandtestsconductedonmanufacturedproductasapartoftheappraisalplan.ThesecostsnormaIJyincludeannualorsemi-annualsamplingofsensitiveproductformoredetailedandextensiveevaluationstoassurecontinuedconformancetocriticalenvironmentalrequirements.

2.2.4ProcessControlMeasurementsThecostofaJJplannedmeasurementsconductedonin-lineprod­uctorserviceprocessingequipmentand/ormaterials(sllchasoventemperatureormaterialdensity)toassureconformancetopreestablishedstandards.Includesadjustmentsmadetomaintaincontinuedacceptableresults.

2.2.5LaboratorySupportThetotalcostofanylaboratorytestsrequiredinsupportofprod-uctorserviceappraisalplans.

2.2.6Measurement(InspectionandTest)EquipmentSinceanymeasurementorprocesscontrolequipmentrequiredisanintegralpartofappraisaloperations,itsacquisition(deprecia­tionorexpense),calibration,andmaintenancecostsareallincluded.Controlofthisequipmentassurestheintegrityofresults,withoutwhichtheeffectivenessoftheappraisalprogram

wouldbeinjeopardy.

2.2.6.1DepreciationAllowancesTotaldepreciationallowancesforaJJcapitalizedappraisal

equipment.

2.2.6.2MeasurementEquipmentExpensesTheprocurementorbuildcostofaJJappraisalequipmentand

gagesthatarenotcapitalized.

198AppendixB

2.2.6.3MaintenanceandCalibrationLaborThecostofallinspections,calibration,maintenance,andcontrolofappraisalequipment,instruments,andgagesusedfortheeval­uationofsupportprocesses,products,orservicesforconfor­mancetorequirements.

2.2.7OutsideEndorsementsandCertificationsThetotalcostofrequiredoutsideendorsementsorcertifications,suchasUnderwriter'sLaboratory,ASTM,oranagencyoftheU.S.government.Includesthecostofsamplepreparation,sub­mittal,andanyliaisonnecessarytoitsfinalachievement.Includescostofliaisonwithcustomers.

2.3ExternalAppraisalCostsExternalappraisalcostswillbeincurredanytimethereisneedforfieldset-uporinstallationandcheckoutpriortoofficialaccep­tancebythecustomer.Thesecostsarealsoincurredwhenthereisneedforfieldtrialsofnewproductsorservices.

2.3.1FieldPerformanceEvaluationThetotalcostofallappraisalefforts(inspections,tests,audits,andappraisalsupportactivities)plannedandconductedatthesiteforinstallationand/ordeliveryoflarge,complexproductsorthecon­ductofmerchandisedservices(suchasrepairsorleasingset-ups).

2.3.2SpecialProductEvaluationsIncludeslifetesting,aswellasenvironmentalandreliabilitytestsperformedonproductionunits.

2.3.3EvaluationofFieldStockandSparePartsIncludescostofevaluationtestingorinspectionoffieldstock,resultingfromengineeringchanges,storagetime(excessiveshelflife),orothersuspectedproblems.

2.4ReviewofTestandInspectionDataCostsinct!rredforregularlyreviewinginspectionandtestdatapriortoreleaseoftheproductforshipment,suchasdeterminingwhetherproductrequirementshavebeenmet.

2.5MiscellaneousQualityEvaluationsThecostofallsupportareaqualityevaluations(audits)toassurecontinuedabilitytosupplyacceptablesupporttotheproductionprocess.Examplesofareasincludedarestores,packaging,andshipping.

3.0

3.1

3.1.1

3.1.2

3.1.3

3.14

3.2

3.2.1

DeN/iledDescriptionofQualityCostElements199

INTERNALFAILURECOSTSCostsresultingfromproductsorservicesnotconformingtorequirementsorcustomer/userneeds.Internalfailurecostsoccurpriortodeliveryorshipmentoftheproduct,orthefurnishingofaservice,tothecustomer.

Product/ServiceDesignFailureCosts(Internal)Designfailurecostscangenerallybeconsideredastheunplannedcoststhatareincurredbecauseofinherentdesigninadequaciesinreleaseddocumentationforproductionoperations.Theydonotincludebillablecostsassociatedwithcustomer-directedchanges(productimprovements)ormajorredesignefforts(jJroductupgrading)thatarepartofacompany-sponsoredInarketingplan.

DesignCorrectiveActionAfterinitialreleaseofdesignforproduction,thetotalcostofallprobleminvestigationandredesignefforts(includingrequalifi­cationasnecessary)requiredtocompletelyresolveproductorserviceproblemsinherentinthedesign.(Somesourcesconsiderthisapreventioncost.)

ReworkDuetoDesignChangesThecostofallrework(materials,labor,andapplicableburden)specificallyrequiredaspartofdesignproblemresolutionsandimplementationplans(effectivity)forrequireddesignchanges.

ScrapDuetoDesignChangesThecostofallscrap(materials,labor,andapplicableburden)requiredaspartofdesignproblemresolutionsandimplementa­tionplans(effectivity)fordesignchanges.

ProductionLiaisonCostsThecostofunplannedproductionsupporteffortsrequiredbe­causeofinadequateorincompletedesigndescriptionanddocu­mentationbythedesignorganization.

PurchasingFailureCostsCostsincurredduetopurchaseditemrejects.

PurchasedMaterialRejectDispositionCostsThecosttodisposeof,orsort,incominginspectionrejects.Includesthecostofrejectdocumentation,reviewandevaluation,dispositionorders,handling,andtransportation(exceptascharged

tothesupplier).

200AppendixB

3.2.2PurchasedMaterialReplacementCostsTheaddedcostofreplacementforallitemsrejectedandreturnedtosupplier.Includesadditionaltransportationandexpeditingcosts(whennotpaidforbythesupplier).

3.2.3SupplierCorrectiveActionThecostofcompany-sponsoredfailureanalysesandinvestiga­tionsintothecauseofsupplierrejectstodeterminenecessarycorrectiveactions.Includesthecostofvisitstosupplierplantsforthispurposeandthecosttoprovidenecessaryaddedinspec­tionprotectionwhiletheproblemisbeingresolved.(Somesourcesconsiderthisapreventioncost.)

3.24ReworkofSupplierRejectsThetotalcostofnecessarysupplieritemrepairsincurredbythecompanyandnotbillabletothesupplier-usuallyduetopro­ductionexpediencies.

3.2.5UncontrolledMaterialLossesThecostofmaterialorpartsshortagesduetodamage,theft,orother(unknown)reasons.Ameasureofthesecostsmaybeobtainedfromreviewsofinventoryadjustments.

3.3Operations(ProductorService)FailureCostsOperationsfailurecostsalmostalwaysrepresentasignificantpor­tionofoverallqualitycostsandcangenerallybeviewedasthecostsassociatedwithdefectiveproductorservicediscovereddur­ingtheoperationsprocess.Theyarecategorizedintothreedistinctareas:materialreviewandcorrectiveaction,rework/repaircosts,andscrapcosts.

3.3.1MaterialReviewandCorrectiveActionCostsCos~.sincurredinthereviewanddispositionofnonconformingproductorserviceandthecorrectiveactionsnecessarytopreventrecui'rence.

3.3.1.1DispositionCostsAllcostsincurredinthereviewanddispositionofnonconform­ingproductorservice,intheanalysisofqualitydatatodeter­minesignificantareasforcorrectiveaction,andintheinvestiga­tionoftheseareastodeterminetherootcausesofthedefectiveproductorservice.

DetailedDescriptionofQ~({{lityCostElements201

3.3.1.2TroubleshootingorFailureAnalysisCosts(Operations)Thecostoffailureanalysis(physical,chemical,etc.)conductedby,orobtainedfrom,outsidelaboratoriesinsupportofdefectcauseidentification.(Somesourcesconsiderthisaprevention

cost.)

3.3.1.3InvestigationSupportCostsTheadditionalcostofspecialrunsofproductorcontrolledlotsofmaterial(designedexperiments)conductedspecificallytoobtaininformationusefultothedeterminationoftherootcauseofaparticularproblem.(Somesourcesconsiderthisapreven­

tioncost.)

3.3.104OperationsCorrectiveAction..TheactualcostofcorrectiveactionstakentoremoveorelimI­natetherootcausesofnonconformancesidentifiedforcorrec­tion.Thisitemcanincludesuchactivitiesasrewritingoperatorinstructions,redevelopmentofspecificprocessesorflowproce­dures,redesignormodificationofequipmentortooling,anddevelopmentandimplementationofspecifictrainingneeds.Doesnotincludedesign(3.1.1)orsupplier(3.2.3)correctiveactioncosts.(Somesourcesconsiderthisapreventioncost.)

3.3.2OperationsReworkandRepairCosts'thetotalcost(labor,material,andoverhead)ofreworkingorrepairingadefectiveproductorservicediscoveredwithinthe

operationsprocess.

3.3.2.1ReworkThetotalcost(material,labor,andburden)ofallworkdonetobringnonconformingproductorserviceuptoanacceptable(con­forming)condition,asauthorizedbyaspecificworkorder,blue­print,personalassignment,orplannedpartofthestandardoperat­ingprocess.Doesnotincludereworkduetodesignchange(3.1.2).

3.3.2.2RepairThetotalcost(material,labor,andburden)ofallworkdonetobringnonconformingproductuptoanacceptableorequivalent,butstillnonconforming,condition;normallyaccomplishedbysubjectingtheproducttoanapprovedprocessthatwillreducebutnotcompletelyeliminatethenonconformance.

202AppendixB

3.3.3

3.3.4

3.3.5

3.3.6

3.3.7

3.4

4.0

Reinspection/RetestCostsThatportionofinspection,test,andauditlaborthatisincurredbecauseofrejects(includesdocumentationofrejects,reinspec­tionortestafterrework/repair,andsortingofdefectivelots).

ExtraOperationsThetotalcostofextraoperations,suchastouch-uportrimming,addedbecausethebasicoperationisnotabletoachieveconfor­mancetorequirements.Thesecostsareoftenhiddenintheaccepted(standard)costofoperations.

OperationsScrapCostsThetotalcost(material,labor,andoverhead)ofdefectiveproductorservicethatiswastedordisposedofbecauseitcannotbereworkedtoconformtorequirements.Theunavoidablelossesofmaterial(suchastheturningsjimnInachiningworkortheresidueinafoodmixingpot)aregenerallyknownaswaste(checkcompanycostaccountingdefinitions)andarenottobeincludedinthecostofquality.Also,inthedefinitionofqualitycosts,theamountreceivedfromthesaleofscrapandwastematerial(sal­vagevalue)isnottobedeductedfromgrossscrapfailurecosts.

DowngradedEnd-ProductorServicePricedifferentialbetweennormalsellingpriceandreducedsell­ingpriceduetononconformingoroff-gradeend-productsorser­vicesbecauseofqualityreasons.Alsoincludesanycostsin­curredtobringuptosaleablecondition.

InternalFailureLaborLossesWhenlaborislostbecauseofnonconformingwork,theremaybenoconcurrentmateriallosses,anditisnotreflectedonscraporreworkreports.Accountingforthecostoflaborforsuchlossesistheintentofthisitem.Typicallossesoccurbecauseofequipmentshutdownsandreset-uporlinestoppagesforqualityreasonsandmaybeefficiencylossesorevenallocatedforby':laborallowances."

OtherInternalFailureCosts

EXTERNALFAILURECOSTSCostsresultiIlgfrom.products.orservicesnotconformingtorequirementsorcustomer/userneeds.Externalfailurecostsoccur

DetailedDescriptionofQualityCostElements203

afterdeliveryorshipmentoftheproduct,andduringorafterfur­nishingofaservice,tothecustomer.

4.1ComplaintInvestigations/CustomerorUserService

Thetotalcostofinvestigating,resolving,andrespondingtoindi­vidualcustomerorusercomplaintsorinquiries,includingnec­essaryfieldservice.

4.2ReturnedGoods

Thetotalcostofevaluatingandrepairingorreplacinggoodsnotmeetingacceptancebythecustomeroruserduetoqualitypr~b­

lems.Itdoesnotincluderepairsaccomplishedaspartofama111­tenanceormodificationcontract.

4.3RetrofitCosts

Coststomodifyorupdateproductsorfieldservicefacilitiest.oanewdesignchangelevel,basedonmajorredesignduetodeSIgndeficiencies.Includesonlythatportionofretrofitsthataredueto

qualityproblems.

4.3.1RecallCosts

Includescostsofrecallactivityduetoqualityproblems.

4.4WarrantyClaims

The;otalcostofclaimspaidtothecustomeroruser,afteraccep­tance,tocoverexpenses,includingrepaircostssuchasremov­inadefectivehardwarefromasystemorcleaningcostsduetoafo~dorchemicalserviceaccident.Incaseswhereapricereduc­tionisnegotiatedinlieuofwarranty,thevalueofthisreduction

shouldbecounted.

4.5LiabilityCosts

Company-paidcostsduetoliabilityclaims,includingthecostofproductofserviceliabilityinsurance.

4.6Penalties

Costofanypenaltiesincurredbecauseoflessthanfullprod~Ict

orserviceperformanceachieved(asrequiredbycontractsWIthcustomersorbygovernmentrulesandregulations).

204AppendixB

4.7

4.8

4.9

Customer/UserGoodwillCostsincurred,overandabovenormalsellingcosts,tocustomersor~serswl:oarenotcO~1pletelysatisfiedwiththequalityofadelIveredpl~ductorserVIce,suchascostsincurredbecausecus­tomers'qualItyexpectationsaregreaterthanwhattheyreceive.

LostSalesIncludesvalue~fcontributionmarginlostduetosalesreductionbecauseofqualItyproblems.

OtherExternalFailureCosts

AppendixCBibliographyofPublicationsandPapersRelatingtoQualityCosts

ThisthirdeditionofPrinciplesofQualityCostshassignificantlyreducedthenumberofpapers,articles,andotherpublicationsincludedinthisbibli­ography.ThiswasnecessitatedbythemanyfinepublicationsonthesubjectsincethesecondeditionandbecausetechnologyhasnowenabledthesearchforqualitycostsmaterialontheInternetand/orthroughASQ'sQualityInformationCenter(QIC).Attemptingtolistacompletebibliographyherewouldberedundant.Thepapersandpublicationsincludedherearethosethat,intheopinionoftheASQQualityCostsCommittee,havesignificantlycontributedtothefieldofqualitycosts.Inaddition,mostpapersonthesub­ject(writtenthrough1987)canbefoundinQualityCosts-IdeasandAppli­cations,Volumes1and2.Milwaukee:ASQCQualityPress,1987and1989,

respectively.

ASQCQualityCostsCommittee,GuideforManagingSupplierQualityCosts.EditedbyW.O.Winchell.Milwaukee:ASQCQuality

Press,1986.ASQCQualityCostsCommittee.GuideforReducingQualityCosts.

Milwaukee:ASQCQualityPress,1986.ASQCQualityCostsCommittee.QualityCostsWhatandHow.

Milwaukee:ASQC,1974.ASQCQualityCostsCommittee.QualityCostsIdeasand

Applications,Volume1and2.EditedbyJackCampanellaandAndrewF.Grimm.Milwaukee:ASQCQualityPress,1987,1989.

Atkinson,JohnHawley,Jr.;GregoryHohner;BarryMundt;RichardB.Troxel;andWilliamWinchell.CurrentTrendsinCostofQuality:LinkingtheCostofQualityandContinuousImprovement.Montvale,NJ:NationalAssociationofAccountants,1991.

205

206Appendi.rC

Atkinson,Hawley;JohnHamburg;andChristopherIttner.LinkingQualitytoProfits.Milwaukee:ASQCQualityPressandMontvale,NJ:InstituteofManagementAccountants,1994.

Campanella,Jack,andFrankJ.Corcoran."PrinciplesofQualityCosts."InAnnualQualityCongressTransactions.Milwaukee:AmericanSocietyforQualityControl,1982.

Campanella,Jack,andFrank1.Corcoran."PrinciplesofQualityCosts."QualityProgress16,NO.4(l983):16-22.

Corcoran,FrankJ."QualityCostsPrinciples-aPreview."InAnnualTechnicalConferencesTransactions.Milwaukee:AmericanSocietyforQualityControl,1980.

Crosby,P."QualityIsFree."NewYork:McGraw-HillBookCompany,1979.

Feigenbaum,ArmandV.TotalQualityControl.3ded.,Chapter7.NewYork:McGraw-HillBookCompany,1983.

Freeman,H.L."HowtoPutQualityCoststoWork."Paperpresentedat12thMetropolitanSectionAllDayConference,1960.

Harrington,H.J.PoorQualityCosts.Milwaukee:ASQCQualityPress,1986.

Juran,J.M.,andFrankM.Gryna.Juran'sQualityControlHandbook,4thed.,Chapter4.NewYork:McGraw-HillBookCompany,1988.

Juran,J.M.,andFrankM.Gryna.QualityPlanningandAnalysis,3ded.,NewYork:McGraw-HiliBookCompany,1993.

Masser,W.J."TheQualityManagerandQualityCosts."IndustrialQualityControl14(l957):5-8.

Morse,WayneJ.;KayM.Poston;andHaroldP.Roth.MeasuringandControllingQualityCosts.Montvale,NJ:NationalAssociationofAccountants,1987.

Williams,R.J."GuideforReducingQualityCosts."InAnnualQualityCongressTransactions.Milwaukee:AmericanSocietyforQualityControl,1982.

Winchell,WilliamO."GuideforManagingVendorQualityCosts."InAnnualQualityCongressTransactions.Milwaukee:AmericanSocietyforQualityControl,1981.

References

Chapter1

1."TheNationalConferenceforQuality,QualityProgress15,no.5(May1952):14-17.

2.H.].Harrington,Poor-QualityCost(Milwaukee:ASQC

QualityPress,1987).

3.].M.JuranandFrankM.Gryna,"Section4,QualityCosts"inJuran'sQualityControlHandbook,4thed.(NewYork:McGraw-HiliBookCompany,1988).

4.MIL-Q-9858A,QualityProgramRequirements(Department

ofDefense,1963).

5.EX.BrownandR.W.Kane,"QualityCostsandProfitPerformance"inAnnualTechnicalConferenceTransactions(Milwaukee:AmericanSocietyforQualityControl,1975).

6.EdgarW.Dawes,"QualityCosts-NewConcept~andMethods."inAnnualQualityCongressTransactIons(Milwaukee:AmericanSocietyforQualityControl,1987).

7.DianeM.ByrneandNancyE.Ryan,eds.,TaguchiMethodsandQFD.(Dearborn,MI:ASIPress,1988).

8.WilliamE.EurekaandNancyE.Ryan,eds.,TheCustomer­DrivenCompany(Dearborn,MI:ASIPress,1988).

9.LanceA.Ealey,QualitybyDesign.(Dearborn,MI:ASIPress,

1988).10.ANSIIASQCQ9004-1-1994,QualityMa~agementand

QualitySystemElements....-Guidelines(MIlwaukee:ASQC

QualityPress,1994):7-8.

207

208References

11.ANSI!ASQCISO/DIS10014,GuidelinesforManagingtheEconomicsofQuality-DraftInternationalStandard,1996.

12.QS-9000,QualitySystemRequirements,3ded.,March1998.

Chapter2

1.JackCampanellaandFrankCorcoran,"PrinciplesofQualityCosts"inAnnualQualityCongressTransactions(Milwaukee:AmericanSocietyforQualityControl,1982).

Chapter3

1..J.D.KrauseandFrankM.Gryna,ActiuityBasedCostingandCostofPoorQuality-aPartnership,UniversityofTampaReportNo.109,1995.

2.J.H.~tkinson,G.Hohner,B.Mundt,R.B.Troxel,andW.Wmchell,CurrentTrendsinCostofQuality(Montvale,NJ,NationalAssociationofAccountantsPublicationNo.91259,1991).

3.D.~.Webster,AchieuingValueThroughActiuity-BasedC?st:ng,~roceedingsofASQC49thAnnualQualityCongress,Cmcmnatl,OH,1995.

Chapter4

1.NatR.BriscoeandFrankM.Gryna,AssessingtheCostofPoorQualityinaSmallBusiness,TheUniversityofTampaCollegeofBusiness-ReportNo.902,May1996.AlsopublishedinQimproQuarterly,India,1998.

2.J.M.JuranandFrankM.Gryna,QualityPlanningandAnalysis,3ded.(NewYork:McGraw-HillBookCompany,1993).

3.J.M.JuranandFrankM.Gryna,"Section22,QualityImprovement"inJuran'sQualityControlHandbook,4thed.(NewYork:McGraw-HillBookCompany,1988).

4.S.T.Knox,"ModelingtheCostofSoftwareQuality"DigitalTechnicalJournal5(4)(Fall1993):9-16.'

5.R.Dion,"ProcessImprovementandtheCorporateBalanceSheet,"IEEESoftware10(4)(July1993):28-35.

6.T.J.Haley,"SoftwareProcessImprovementatRaytheon"IEEESoftware13(November1996):33-41.'

References209

7.MarkC.Paulk,BillCurtis,MaryBethChrissis,andCharlesV.Weber,CapabilityMaturityModelforSoftware,Version1.1(CMUlSEI-93-TR-25)(Pittsburgh:SoftwareEngineeringInstitute,CarnegieMellonUniversity,1993).

8.SoftwareQualityStandards:TheCostsandBenefits.AreviewfortheDepartmentofTradeandIndustry,PriceWaterhouseManagementConsultants.

Chapter5

1.WilliamWinchell,"DrivingBuyerSatisfactionbyQualityCost"50thAnnualQualityCongressTransactions.(Milwaukee:AmericanSocietyforQualityControl,1996).

2.].M.JuranandFrankM.Gryna,QualityPlanningandAnalysis:FromProductDeuelo!7mentThroughUse,3ded.(NewYork:McGraw-Hill,Inc.,1993).

3.DonaldG.Newnan,EngineeringEconomicAnalysis,4thed.(SanJose:EngineeringPress,1991).

Chapter6

1.T.Haley,"SoftwareProcessImprovementatRaytheon,"IEEESoftware13(6)(November,1996):33-41.

2.R.Dion,QuantifyingtheBenefitofSoftwareProcessImprovement,ProceedingsoftheSEI/AIAASoftwareProcessImprovementWorkshop,November8,1990,Chantilly,VA.

3.R.Dion,CostofQualityasaMeasureofProcessImprouement,ProceedingsoftheSEISoftwareEngineeringSymposium,September17,1992.

4.R.Dion,"ProcessImprovementandtheCorporateBalanceSheet,"IEEESoftware10(4)(July1993):28-35.

5.T.Haley,B.Ireland,E.Wojtaszek,D.Nash,andR.Dion,RaytheonElectronicSystemsExperienceinSoftwareProcessImprouement,TechnicalReportCMU/SEI-95-TR-017,November1995.

6.H.Krasner,AccumulatingtheBodyofEuidenceforthePayoffofSPI-1997,seewww.utexas.edu/coe/sqi/archive.

INDEX

A

ABC.SeeActivity-BasedCostingaccounting

computerization,65,69inCoSQ,97-100generalaccountingpractices,

182-183interfacewithquality,15-16andqualitycosts,61-62SeealsoAppendixA;cost

accountingsystemsActivity-BasedCosting(ABC),

xvi,58-70andtheaccounting

department,61-62advantages,69-70definition,61identifyingandanalyzing

qualitycosts,66,69overheadcosts,62-65

advocate(qualitymanager),45,53aircraftmanufacturing,34AmericanSocietyforQuality.See

ASQAmericanSupplierInstitute

(ASI),12AppendixA,"BasicFinancial

Concepts,"15,61,63,179-185

balancesheets,183-184

211

AppendixA,"BasicFinancialConcepts,"-continued

costofgoodsproduced,181costofgoodssold,181datacollection,182-183generalaccountingpractices,

183overheadcosts,179,181primecosts,179profitandlossstatements,185revenuesandprofit,181

AppendixB,"QualityCostElements,"19,31,32,33,50,53,54,55,187-204

appraisalcosts,195-198externalfailurecosts,

202-204internalfailurecosts,

199-202preventioncosts,187-195summaries,188-189

AppendixC,Bibliography,33,205-210

appra~alco~~9,32,195-198analysisof,18,19definition,4,5history,xviinsmallbusinessstudy,

83-84,87andsuppliers,74Seealsocosts

212II/dex

ASQAutomotiveDivision,29QualityCostsCommittee,

2,150auditing,20,32automation,9,32,37AutomotiveDivision,American

SocietyforQuality(ASQ),29AutomotiveIndustryAction

Group(AlAG),29automotiveindustryqualitycosts,

29-30

B

balancesheets,183-184BaneOneCorporationexample,

153-161banking,103,153-161basesforqualitycosts,34-37,89

factors,36-37indices,35long-range,34-35short-range,35types,36

basicfinancialconcepts.SeeAppendixA,"BasicFinancialConcepts"

benchmarking,107buyers.Seecustomers

cCampanella,]ack,.Principlesof

QualityCosts,3rdEdition,21causeandeffectanalysis940

54,106,133,-134",Chrysler,29commercialcontracts,2commercialstandards,19,21competition,36.

fromabroad,6,37conformancecost,25-27

{..\:""....._------

consumerandregulatorygroups,2continuousqualityimprovement,

4,8,143,152contracts.Seecommercial

contracts;governmentcontracts

contributionmargin,144controIler,16,34,53controversialcosts,99-100CoQ.SeeCostofQuality(CoQ)correctiveaction,4,72CoSQ.SeeCostofSoftware

Quality(CoSQ)costaccountingsystems,xviii,

4,15example,63-65andinternalqualitycost

procedure,52-57summaryreport,57Seealsoacccounting;

AppendixAcostbase,36costdrivers,63-69costofnonconformance.See

nonconformanceCostofQuality(CoQ),3,29,

92-93CostofQuality(CoQ)principles,

92-93CostofQualityWorksheet134

135',

CostofSoftwareQuality(CoSQ),89-102,169-177

costscomparisonsof,107-108controversial,99-100direct,61,62-63excessive,xvfixed,63ofgoodsproduced,181ofgoodssold,181labor,35,55,61overhead,61,62-65,69,70,

179,181

costs-continuedprime,179qualityversuscosts,xvii,3,12replacement,55retrofit,151standard,61-62SeealsoActivity-Based

Costing;appraisalcosts;failurecosts;preventioncosts;qualitycosts

cumulativefrequencydistribution,40,42,43

customerscomplaintsof,10consumerandregulatory

groups,2defectionsof,84-85example,142-52goodwillof,150maintainingabase,4problem-solvingexample,

133-141respondingto,17satisfactionof,3,12,23,28,

29,142-152surveysof,21

cycletimereduction,27

D

datacollectionandanalysis,54-58

DefenseDepartment.SeeU.S.DepartmentofDefense

depreciation,63design,103,104,106,125designerrors,125Dian,R.,93directcosts,61,62-63directlabor,35,61,63,

179-180DOD.SeeU.S.Department

ofDefense

"""Index213

DraftInternationalStandard(DIS)stage,27

"DrivingBuyerSatisfactionbyQualityCost"(Winchell),142

E

economicsofquality,2-8,17,23,27

educationcasestudiesofCostofQuality,

161-168formaltraining,36,40professionaltraining

programs,2forqualitycost

implementation,50-52employeeempowerment,126engineeringdesign,xviengineeringeconomicsprinciples,

152EuropeanstandardEN-29000,21evaluation.Seeappraisalcostsexternalfailurecosts.Seefailure

costs

F

failurecosts,9-11,32-33analysisof,17-18,19casestudy,130-133definition,4-5external,S,33,83,202-204hidden,6-7,12-13,18,24-25history,xviinternal,S,32-33,83,

199-202andrework,3andsuppliers,74Seealsocosts

Feigenbaum,A.Y.,TotalQualityControl,l

fieldfailures,126

214index

financialmanagement,xviiiSeealsoAppendixA,"Basic

FinancialConcepts"financialmeasurementofquality,

21-22financialservices,xvifixedcosts,63flagwaving,58Ford,29Freeman,Harold,"HowtoPut

QualityCoststoUse,"1

G

GeneralElectric,xvGeneralMotors,29Germanautomotivequality

standard(VDA6.1),30"goldinthemine,"1,19,24governmentauditors,20governmentcontractorsand

subcontractors,1,2,20SeealsoU.S.Departmentof

Defensegovernmentcontracts,2Gryna,FrankM.,xvi,3GuideforManagingSupplier

QualityCosts,ASQQualityCostsCommittee,2

GuideforReducingQualityCosts,ASQQualityCostsCommittee,2

H

Haley,T.].,"SoftwareProcessImprovementatRaytheon,"93

Harrington,H.].,3healthcare,xvi,103hiddenqualitycosts.Seequality

costs;supplierqualitycosts"HowtoPutQualityCoststo

Use"(Freeman),1humanerror,9

I

iceberganalogyofhiddenfailurecosts,7,12,24-25

IEEEComputerSociety'sSoftwareProcessAchievementAward,170

IEEESoftwareEngineeringStandards,91

independentregistrars,20indirectcosts,61-63indirectlabor,180-181inspectionerrors,126insurance,63,103intangiblequalitycosts.See

qualitycosts,hidden.internalfailurecosts.

Seefailurecostsinternalqualitycostprocedure,

52-54InternationalOrganizationfor

Standardization(ISO),21ISO9000-3,91ISO9004-1:1994Quality

ManagementandQualitySystemElements-Guidelines,22,27,30

ISO10014GuidelinesforManagingtheEconomicsofQualityDIS,22-23,27-28

ISO9000,xvi,1,20-21economicsmodel,23andqualitycosts,21-29

ISOTechnicalReport,27ISOrrC176,27

JJapan,competitionfrom,6Juran,].M.,QualityControl

Handbook,1,19Just-In-Timeprocedures,26,

27,36

K

Knox'smodelofsoftwarequalitycosts,93,94,96

L

laborbase,36laborcosts,35,36,55,61

indirect,61,63,180,181lawofsupplyanddemand,37leader/advocate(quality

manager),45,53liabilitycosts,150lineresponsibilities,126long-rangebases,34-35lossofsalesrevenue.SeeSaleslosstosociety,12Lotus1-2-3®,55

M

MajorEquipmentReplacementProjectattheUniversityofWesternOntario,163-165

managementcommitmentof,104,105monitoringby,38aphilosoph}"of,2-8presentationto,47--48ofqualitycosts,17-19reportsto,58,72-73,supportof,xv,xvii,4,

45--46manager,quality,34,114,

115,128manualofaccounts,53manufacturing,103,104manufacturingindustries,xvi,

xviii,4,103,153marketing,103,104Masser,w.].,"TheQuality

ManagerandQualityCosts,"1

materialpricefluctuations,37

index215

measurement.Seeappraisalcostsmetricscollection,100MicrosoftExcel®,55MIL-Q-9858A,QualityProgram

Requirements,U.S.DepartmentofDefense,1,19,20,21

militarystandards.SeeU.S.DepartmentofDefense

money,languageof,xv,21

N

nonconformance,xv,4,25-27costof,25-27,30

nonvalue-addedsteps,61-62,70

ooperator-controllabledefects,125originalequipmentmanufacturer

(OEM),29,30overheadcosts,62-65,69,70,

179,181

p

Paretoanalysis,17-18,42,43,68,76,101,112-113

penalties,150performance

standardsof,4Seealsoqualityimprovement

pilotprograms,xv,48-50planning,strategic,38,73-74,105"poorqualitycost",3preventioncosts,5,9,31-32,

187-195analysis,18definition,4-5history,xviinsmallbusinessstudy,84andsuppliers,74Seealsocosts

216Index

PriceWaterhousestudyofCoSQ,96

primecosts,36,179PrinciplesofQualityCosts,1st

and2ndEditions,ASQQualityCostsCommittee,2

PrinciplesofQualityCosts,3rdEdition(Campanella),21

problemsolving,103,106process-costmodel,25-27productcycle,103production/serviceschedules,36professionaltrainingprograms.

Seeeducationprofitcenter,104-106profitandlossstatements,104,

185profitsector,xviprofits,3

casestudy,126-130andhiddenqualitycosts,6-7improvementin,71,103

purchasing,103,104

QQCPI.Seequalityperformance

indexQLF.SeeQualityLossFunctionQS-9000,xvi,1

automotiveindustryqualitycosts,29-30

qualitycomparativecostof,8costsof,3,29economicsof,2-8,17,23,27interfacewithaccounting,

15-16measurementof,21-22Taguchi'sdefinitionof,12typesofcharacteristics,13

qualityassurance,104QualityControlHandbook

(Juran),1

qualitycostanalysisexample,113-125

qualitycostelements,33.SeeAppendixB,"QualityCostElements"

qualitycostprogramimplementation,45-70

analysisofdata,55-58collectionofdata,54-55educationofkeyemployees,

50-52financialdatareview,45internalprocedure,52-54managementpresentation,

47-48managementreports,58,60,

72-73manager(advocate),45pilotprogram,48-50planningfor,45-47progresscharts,58SeealsoActivityBasedCosting

(ABC);quality;qualitycosts;qualityimprovement

qualitycostsystems,16,31,33,105categories,31-33definitions,31-44elements,19,31,33,50,51,

52,53,54,55,187-204individualprograms,31,33standardsfor,16stepsof,42,44trendanalysis,37-44,108-111Seealsobasesforquality

costs;qualitycostprogramimplementation;qualitycosts;quafitycostsImprovement

QualityCosts:IdeasandAfJlJlications(Volumes1and2),ASQQualityCostsCommittee,2

qualitycostsautomotiveindustry,29-30

qualitycosts-continuedclassicmodelandnewmodel,

9-10definition,4-5goalsof,8-11hidden,6-7,12-13,18,

24-25,27,70history,xvi,1-2andISO9000,21-29managementof,17-19measurements,4process-costmodel,25-27andqualityimprovement,24,

71-73qualityversuscosts,xvii,12

quality-costingmodel,24quality-lossmodel,24-25andthestrategicbusinessplan,

73-74useof,71-102SeealsoActivity-Based

Costing;basesforqualitycosts;costs;quality;qualitycostsystems;supplierqualitycosts

QualityCosts-WhatandHow,ASQQualityCostsCommittee,2

qualityimprovementbenefits,52andcustomersatisfaction,52,

142-152findingproblemareas,

107-113measurement,71Paretoanalysis,112-113philosophy,103-104programming,105-107qualitycostanalysisexample,

113-125andqualitycostreduction,

103-152andqualitycosts,71-73andsuppliers,141-142

Index217

qualityimprovement-continuedtargetsfor,58,59teamapproach,125-141trendanalysis,108-111Seealsoperformance;quality;

qualitycosts;qualitycostsimplementationprogram

QualityLossFunction(QLF),12-15

qualitymanager,34,114,115,128

"TheQualityManagerandQualityCosts"(Masser),1

qualityperformanceindex(QCPI),77-80

quality-costingmodel,24quality-lossmodel,24-25QuattroPro®,55

R

Raytheon'sElectronicSystemsGroup(RES),93,95,96,102,169-177

registrars,independentorthird-party,20

rent,63replacementcosts,55RES.SeeRaytheon'sElectronic

SystemsGroupretailindustries,103retrofitcosts,151returnoninvestment(ROI),xviii,-­

48,80,97,139-140revenuesandprofit,181rework,3,4,7,12,17,26,61,

66,141riskanalysis,18robotics,9,37ROJ.Seereturnoninvestmentrootcauses,9,17,38,134

example,66-69insmallbusinessstudy,89

218Index

ssales

impacton,xvilossof,xv

salesbase,36scorecarding,107scrap,4,7,12,17,26,54,55,

61,66,141seasonalproductsales,37SEICMM.SeeSoftware

EngineeringInstitute'sCapabilityMaturityModel(SEICMM)

serviceindustries,xvi,xviii,4,103,153

consulDerandregulatorygroups,2

reworkin,3,4short-rangebases,35singleprocessinitiative,19,21slDallbusinesscostofquality

study,81-89companiesstudied,81conclusions,89recommendationsformaking

astudy,85-88reportingthestudy,88-89resultsofstudy,81-84salesrevenue,84-85

.smallbusinesses,xvisociety,lossto,12SoftwareEngineeringInstitute's

CapabilityMaturityModel(SEICMM),93,94,170,172,173

"SoftwareProcessImprovementatRaytheon"(Haley),93

softwarequalitycosts,xvi,89-102accounting,97-100analysisanddynamics,101benefitsofusingCoSQ,97CostofQuality(CoQ)

principles,92-93

softwarequalitycosts-continuedCostofSoftwareQuality

(CoSQ),92-96definitionofsoftware,89-90definitionofsoftware

quality,91developmentandeconomicsof

software,90elementsofCoSQ,97-102importance,91-92Knox'smodel,93,94,96metricscollection,100Raytheonstudies,93-96,102,

169-177reportingtomanagement,

101-102sampleCoSQchart,98-99SEICMMmodel,93,94,170,

172,173spreadsheets,55,56stand-alonepointofview,58standardcosts,61-62strategicbusinessplanning,38,

73-74,105suppliercontrol,76-77supplierqualitycosts,74-80

exampleofratingprogram,77-80

hidden,74-76andqualityimprovement,

141-142qualityperformanceindex

(QCPI),77-80returnoninvestment

analysis,80supplyanddemand,37supportservices,63

T

Taguchi,Genichi,12TaguchiQualityLossFunction

(QLF),7,12-15,25taxes,63

teams,24casestudyI-profit

improvement,126-130casestudy'2-failurecost

improvement,130-133implementationguidelines,141importanceof,50problemsolvingby,xviproblem-solvingexample,

133-141inqualityimprovement,

125-141technology,9TelephoneSystemReviewProject

attheUniversityofWesternOntario,165-168

third-partyregistrars,20TotalQualityControl

(Feigenbaum),1totalqualitycosts,5,103,106TotalQualityManagement

(TQM),23,27trade-offdecisions,xviiTransmotorDivisionexample,

113-125trendanalysis,37-44,108-111

cumulativefrequencydistribution,40,42,43

inqualityimprovement,108-111

TruckManufacturers,29

Index219

uunitbase,36UniversityofWesternOntario

CoQcasestudies,161-168U.S.DepartmentofDefense,1,3,

19-21MIL-Q-9858A,Quality

ProgramRequirements,1,19-21

Seealsogovernmentcontractorsandsubcontractors

vvalue-addedcosts,35VDA6.1,Germanautomotive

qualitystandard,30

wwarranties,7,12,63,106,150Webster,D.W.,69WestinghouseElectric

Corporation,7Winchell,William0.,"Driving

BuyerSatisfactionbyQualityCost,"142