Eliminating the Costs of Poor Quality

Vimala Balusamy, CQP MCQI, Quality and Project Management Consultant, India, shares her five steps to help prevent poor quality costs in businesses.

When a customer experiences poor quality or bad service from an organisation, they will often go to the latter’s competitor to meet his/her demands. This is the reason that ISO 9001:2015 emphasises the periodic assessment on the Conformity of Products and Services (Clause 9.1.3(a)) and Customer Happiness (Clause 9.1.3(b)).

Producing high-quality products is therefore key for organisations to survive and thrive in the long term, albeit this may not always guarantee their success. This is because quality costs have a direct impact on profit margins, which influences the profitability ratio of a business. Since the profitability depends on project productivity, an organisation should ensure that it controls the costs of poor quality at all times. The organisation in question must also make sure that it treats cost and quality with equal importance, by establishing the right strategies for the key factors that affect quality to increase profits and productivity.

Developing and producing high-quality products requires total quality management (TQM) of design, performance, transportation, storing, issuing/selling along with effective vendor and customer communications. Quality is affected in each of those areas and managing them correctly will help businesses to achieve high-quality products each time.

There are five key steps that quality teams can follow to prevent poor quality costs. These are described in the following steps, which the author suggests could be trialled by a quality team in one of their departments first to review and check the success, before rolling them out to the entire project or organisation.

Step one: Identification of quality costs

Before starting the process, it is crucial for businesses to understand the types of costs and factors that affect quality. These include the following:

  • Prevention costs – the cost of all activities specifically designed to prevent poor quality such as errors or defects from occurring in products or services. This includes direct costs (eg, better raw materials, enhanced technical processes) and indirect costs (eg, quality management system(s) set up and training).
  • Appraisal costs – to ensure businesses meet the acceptance criteria, which includes quality control activities such as sampling, measuring, testing, inspecting, checking and evaluating the product quality.
  • Internal failure cost – cost resulting to rectify the errors and defects that affect the product quality before handing the product/services to the customer. This includes direct costs such as reworks/repairs and indirect costs (eg, a demotivated workforce).
  • External failure costs – occurs mainly when an internal inspection fails. Costs resulting from products or services not conforming to the requirements or customers’ needs. It is the highest cost of quality management because it can affect the reputation of an organisation.

1.2 Focus on factors impacting quality costs

Quality can be affected by either internal or external factors. Often the internal factors are only controllable with appropriate measures, and there is little or no control over external factors.

A few examples of internal factors are:

  • Inadequate health and safety/adherence;
  • Poor equipment maintenance;
  • Poor/bad communication with vendors/suppliers;
  • Inaccurate cost estimates;
  • Underperforming staff or suppliers.

Meanwhile, some examples of external factors could be:

  • Price volatility;
  • Technological disruptions such as infrastructure investments or information security updates;
  • Geo-political/policy changes (eg, trade restrictions, statutory/regulatory requirements);
  • Pandemics.

Identifying key quality activities and recording the cost(s) of quality (both good and bad) can be done by hiring a third-party consultant to set up the quality management system (under preventive cost). Alternatively, senior management teams can form an interested group from cross-disciplines across the business, which is headed up by the quality assurance expert. In this step, start the quality cost register with ‘Tasks’ as a first column that involves the following activities for the quality improvement team(s):

  • Identify all activities of prevention and appraisal;
  • List all the failures or results from internal or external factors;
  • Group the activities by applying 5s Lean Management Technique. For example: required, not required, required later;
  • Remove all non-value and non-cost effective activities (grouped as not required/required later).

Step two: Data gathering

As quality costs are tangible, it helps the quality improvement team to substantiate their standard (eg, organisational policy, statutory and regulatory requirements) with quantification.

For this step, start by determining the failure cost to understand the deviation, followed by appending the quality cost register.

The following cost estimates can be obtained from the Cost Estimates Team or from those members of staff who are involved in the correction process:

  1. Average task time;
  2. Hourly rate (this can be obtained from the Cost Estimates Team or simply by dividing the total wages charged to the department by the number of worker/staff/manpower);
  3. Cost of element – average task time (hourly rate);
  4. Material cost on reworks (where applicable);
  5. Internal failure cost;
  6. External failure cost;
  7. Calculate the total failure cost for a given period.

Step three: Measuring the performance

The third step involves carrying out the following points (below), using the Quality Cost Register:

  • Generate the quality cost report along with the prevention and appraisal cost(s) of all the identified activities, as per step one.
  • Categorise the activities that can result from positive and negative outputs.
  • Adjust the cost of products or services with this cost of quality.
  • Rank problems by failure using Pareto analysis.

Step four: Brainstorming the solution

Trend charts can help to visualise the problem areas that cause poor quality costs. With the help of a Pareto chart, most problematic areas can be figured out, which is what the next step involves in determining the root cause of the deviation.

4.1 Determine the root cause

The Fishbone, Cause and Effect, and 5 Whys analysis models are several tools that can be used to identify the root cause of the problem. The primary cause is broadly grouped under the ‘5 Ms’ – men, material, measurement, method and machinery – and the secondary cause generally falls under the following categories:

  • Human error(s);
  • Substandard material(s);
  • Faulty measurable equipment;
  • Machinery faults;
  • Improper method(s) such as temperature adjustments or pressure tests;
  • Environmental impacts (eg, dust, humidity and temperature).

4.2 Implement the solution

After identifying the root cause of the problem(s), the next step for the Quality Improvement Team is to brainstorm the issues that have been discovered, and list the next actions that need to be carried out to help reduce or prevent poor quality costs for the business in question.

This can be carried out by:

  1. Looking at the cause and effect diagram and proposing a prevention plan;
  2. Setting the team’s goal for reducing frequency of occurrence;
  3. Calculate the return on investment (ROI) and payback period;
  4. Reporting the findings to the senior management team.

Step five: Tracking the performance

The final step involves tracking and measuring performance with the help of trend charts, and repeating the steps from Step Two to ensure the effectiveness of the correction action(s) that are being undertaken across the organisation to achieve a successful outcome.

For successful implementation of the quality cost system, businesses should ensure:

  • Top management analyse, identify and resolve any problems as they arise;
  • Proposed corrective actions are implemented properly;
  • Quality cost calculation becomes a mandatory part of the accounting process;
  • Quality cost reporting is merged into the organisation’s quality management system;
  • SMART (Specific, measurable, attainable, realistic and time-bound) quality cost objectives are set and adhered to at all times.

By carrying out these steps correctly, businesses will be able to produce high-quality products that meet their requirements, which, in turn, will reduce or prevent failure costs as a result of poor quality. More importantly, it will help staff feel more empowered and encouraged to focus on developing a quality culture that can be adopted in all aspects of their organisation.

Attribute to original publisher/ publishing organization: Vimala Balusamy, CQP MCQI, Quality and Project Management Consultant, India, https://www.quality.org/knowledge/eliminating-the-costs-poor-quality

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