LINKAGE OF QUALITY IMPROVEMENT AND PROFITS The Cost of Quality

BACKGROUND OF QUALITY COSTS Dr. J.M. Juran introduced the concept in 1951 in his Quality Control Handbook. ASQ Quality Cost Committee established in 1961: a technical committee in ASQ’s Quality Mgt. Division. A. V. Feigenbaum wrote the classic “Total Quality Control” in MIL-Q-9858A Quality Program Requirements, 1963 Philip B. Crosby “popularized” its use because of his book Quality is Free in 1979.

BACKGROUND OF QUALITY COSTS Current Quality System Standards reference its use for quality improvement ISO 9001: 2000 ISO TS (QS 9000) IWA-1 (Healthcare) Others

EVOLUTION OF THE TRADITIONAL QUALITY MANAGEMENT APPROACH 1.Not keyed to specific results. 2.Too large scale and diffused. 3.Results is a four-letter word. 4.Delusional measurements. 5.Staff and consultant driven. 6.Bias to orthodoxy, not empiricism. Six major reasons why many quality efforts are doomed to fail:

SYMPTOMS OF POOR IMPLEMENTATION OF COST OF QUALITY METHODS Many Cost of Quality Systems have “failed.” Many companies have abandoned or de-emphasized COQ measurement. COQ programs have not kept pace with strategic management requirements. Most COQ systems omit white- collar costs. Lost sales costs due to poor quality not captured by COQ system. COQ systems frequently inadequate for management decisions and problem-solving. Reported costs of many COQ systems are poor performance measures.

UPDATING THE “COST-OF-POOR- QUALITY” APPROACH 1.Cost-of-poor-quality programs did not keep pace with the strategic management requirements or initiatives of the recent economic downturns. 2.White-collar costs were omitted by most CoPQ systems. 3.Lost sales opportunities due to poor quality were omitted from reported poor quality costs. 4.Reported poor-quality costs are frequently inadequate for problem solving and management decision making. 5.Reported poor-quality costs are a poor performance measure. The traditional “Cost-of-Poor-Quality” concept did not provided useful support for quality improvement processes because: Principles of Quality Costs, 3 rd Ed. addresses the more appropriate “Cost of Quality” full business approach.

EVOLUTION OF QUALITY Stage 1Stage 2Stage 3Stage 4 Inspection Statistical Quality Control Quality Assurance Strategic Quality Management Inspect in - Quality Build in - Quality Manage in – Quality Control in - Quality  Detection  Quality is a problem to be solved  Control  Quality is a problem to be solved  Use statistical tools and techniques Adapted from: David A. Garvin, Managing Quality  Coordination  Quality is a problem to be proactively attacked  Include entire production chain  Prevention focus  Strategic focus  Quality is a competitive opportunity  Involve everyone in organization

DEFINITION OF QUALITY Customer perception from defect free to superior value Higher conformance to requirements at lower costs Must also consider changing and future customer needs

QUALITY – A COMPETITIVE WEAPON Increased conformance = lower costs = increased financial performance Customer perception: high quality = superior value of higher reliability and lower price On time delivery related to quality = customer satisfaction

TRADITIONAL VS. VALUE-DRIVEN STRATEGY Conformance to requirements emphasizing tools, techniques and processes Strategy should also include: Emphasis on lower costs and increased profits Quality improvement focus on non-financial measures: Conformance to requirements Number of teams Number of suggestions received Number of employees involved Number of Quality Improvement projects Traditional Quality Improvement Strategy

TRADITIONAL VS. VALUE-DRIVEN STRATEGY (CONT.) Link quality improvement to broader business goals of: lower costs improved profitability increased market share reduced risk Identify and quantify non-value activities and waste driven by poor quality Demonstrate cause-and-effect relationship between quality and profitability Select projects that improve both financial and non-financial performance Value-Driven Quality Improvement Strategy

LESSON TWO OBJECTIVES This lesson discusses the application of Cost of Quality principles to different types of quality initiatives and business environments, including: ISO 9001/Manufacturing The Service Sector Small Business Six Sigma Lean Balanced Scorecard Suppliers

COQ CATEGORIES Prevention Costs Appraisal Costs Failure Costs Internal Failure External Failure

PAF MODEL FOR QUALITY COST (CONT.) Another view of the PAF model PreventionAppraisal InternalFailureExternalFailure

COST OF QUALITY CONTROL MODEL

COMPARATIVE COST OF QUALITY $ $ $ MostcostlyLesscostlyLeastcostly The customer finds defects in the delivered parts or service. You find the defects and make corrections internally. Your system prevents the defects. Your organization’s quality management system is designed, planned, and organized for defect prevention and continuous quality improvement.

Organizational Improvement (cont.) Quality Improvement Cycle Cost driver analysis Root cause identified Cost-benefit analysis Team chartered Root cause eliminated Quality cost reduced Business Goals Profit Market share Cost reduction Return on assets Stock price Formal Quality Cost System Chart of accounts Activity-based drivers Field service data Scrap reports Informal Estimates Standard cost of an errors Lost sales Lost opportunities Business process analysis Allocation of employee time Quality Cost Database

COQ IMPROVEMENT MODEL 1.Steering committee 2.Establish COQ baseline 3.Project selection 4.Team selection 5.Cost driver analysis 6.Identification of solutions 7.Implement selected solutions 8.Follow up

STEERING COMMITTEE Management team Quality council Continuous improvement management team

PROJECT SELECTION Use COQ baseline data to identify largest non-valued added activities and waste Determine which would have largest impact on business goals and objectives Determine which would have biggest impact on customer satisfaction Determine magnitude of failure costs in terms of: Percent of sales. Percentage of direct labor costs. Percent of company cash flow. Percent of companies’ capital investment.

DETERMINING PROBABILITY OF SUCCESS Management readiness for change Project timing Availability of resources Company track record Degree of project difficulty Size of project

TEAM SELECTION Team membership Effective improvement teams

TEAM MEMBERSHIP Appointed vs. volunteer members Cross functional representation Team leader Team facilitator Team experts

EFFECTIVE IMPROVEMENT TEAMS Management Role: Readiness for team decision Project charter Project sponsor/manager Team Role: Team building Team logistics Project Role: Disciplined methodology Tools training

SUMMARY OF SUCCESSFUL COST-OF-POOR- QUALITY INITIATIVES 1.Integration with the strategic management requirements and initiatives of the recent economic turnaround. 2.Assessing the costs of poor quality. 3.Estimating the lost sales opportunities due to poor quality. 4.Integrating the cost of poor quality into the organization’s management decision-making and problem-solving processes. 5.Using the cost of poor quality to develop targeted performance measures. Common elements that companies are using to overcome the limitations associated with quality management and cost-of-poor- quality approaches:

QUESTIONS, DISCUSSION…. Grace Duffy (352)