Effective methods for
measuring the cost of poor quality
Dr. Lars Sörqvist
Royal Institute of Technology, Department of Production Engineering, SE-100 44 Stockholm, Sweden.
E-mail: lars.sorqvist@sandholm.se, Fax: +46 8 796 0046
There is a lot of talk about the cost of poor quality these days. Competition is becoming stiffer, and more companies and organisations are trying hard to reduce their non-value creating costs as a means of increasing their competitiveness. Public bodies are being forced to make cutbacks and savings to save the nation's economy. All of this is being done at the same time as awareness is building up of how high the cost of poor quality really is. A recent survey among Swedish company managers showed, for instance, that on average the cost of poor quality is believed to correspond to some 25 per cent of a company's sales. The real cost of poor quality would probably be even higher if it was possible to calculate the value of the immense effects poor quality often has on the market in the form of bad will and loss of customers.
It is very important for a company to know how high its poor quality costs are in order to motivate all parties to make systematic improvements. By drawing attention to the often gigantic costs, we reveal the potential for improvement on which investment decisions on corporate and product development should be based. The introduction of a monetary unit into the quality measurements also helps to create a simple means of comparing and prioritising between different problems. The cost of poor quality can also be used to monitor trends in quality over a period of time.
Many companies have tried for a long time to calculate the cost of poor quality, but they have come up against serious problems. A high proportion of the costs have proved difficult to measure and have thereby remained hidden. Attempts to measure these costs have been the most successful on the production side, which has sometimes led to sub-optimisation, with improvement work being concentrated (wrongly) on production. The accuracy of the measurements isn't always what it might be, which has resulted in misleading comparisons. Problems arise in connection with difficulties in obtaining reports from the personnel containing the requested information. Moreover, there is often much disagreement when it comes to deciding which costs should be regarded as being associated with poor quality.
This article presents a summary of the methods developed at the Royal Institute of Technology in Stockholm for measuring the cost of poor quality. The research project, which has been carried out in collaboration with Swedish business, was initiated and supervised by Professor Lennart Sandholm and performed by Lars Sörqvist. The project, which began in 1993, has involved almost 35 Swedish companies, firstly in general studies and later in more detailed case studies. Some of these companies are: Scania, SSAB, Ericsson, Volvo, SAAB, Sandvik, SAS, Telia, Teli, the Swedish Post Office and a number of smaller companies. Several international experts have helped with support and advice, among whom I may mention Blanton Godfrey, Frank Gryna and William Golomski.
THE CONCEPT OF THE COST OF POOR QUALITY
In order to clarify what is meant by the cost of poor quality, it is necessary to provide a clear and comprehensive definition. A suitable definition is "the costs which would be eliminated if a company's products and the processes in its business were perfect". To apply this usefully to a particular company, it is then necessary to identify the individual parameters which reflect the cost of poor quality. At a general level, these could be reworking, rejects, complaints, lost sales, etc. throughout the company. They should then be broken down further until specific activities are reached.
The cost of poor quality is usually divided into internal and external failure costs and control costs. Preventive costs also used to be included, but these should rather be seen as an investment in quality and not as a cost arising out of poor quality. There is little need to measure these, as the information available is never sufficient to make an optimalisation analysis possible.
The problems which cause poor quality cost may be divided into sporadic and chronic problems. Sporadic problems are those which occur in an acute situation and cause disturbances, while chronic problems tend to be hidden and accepted. In many cases, the chronic problems are very costly, but also require more detailed analysis if they are to be detected.
MEASURING THE COST OF POOR QUALITY
There are two general methods for measuring the cost of poor quality in an organisation. Either a measuring system is built up to enable employees report the quality failures which occur, or an assessment is performed, in which a team analyses the business as a means of identifying poor quality costs. By tradition, most companies have endeavoured to introduce permanent measuring systems - often without realising that there are alternatives and without questioning their choice. Experience shows that company-wide measuring systems are very difficult to use successfully, as they require very far-reaching changes in attitudes and corporate culture. The time required can also vary widely, as a measuring system may take several years to build up, while a study can usually be carried out in a few weeks. Below we have presented a model developed by the author, in collaboration with Swedish business, which demonstrates how both methods can be used. In many cases it may be particularly useful to employ a combination of the two methods.
Assessment
An assessment to map the quality status becomes simple and systematic if the analysis is made sequentially along the processes in the business. By starting the study with external customers and moving back to external suppliers, valuable information can be obtained from later stages in the process on problems in earlier stages. Such studies consist of four phases.
Phase 1: Preparation. The scope of the assessment and the break-down level required are established. This decision represents a balance between the quality of the study's result and the time taken. The project team which is to carry out the assessment is appointed. It should be cross-functional in character, so that the team is well informed about all aspects of the business. Employees from the financial and quality functions can make a valuable contribution. The team is then given training to ensure its members have the necessary skills and understanding.
Phase 2: Planning. The purpose of the assessment is stated in detail. A timetable for the work is drawn up, giving clear final and subsidiary targets. The necessary resources are allocated. The methods for the work are established. An inventory is made of what secondary data are available. Brainstorming is used to produce a list of potential costs of poor quality in the business.
Phase 3: Performance. The work can be carried out in accordance with two principles. According to the first principle, the existing faults and failures are listed, their frequency is determined and their costs are estimated. This method is called deviation analysis. The second principle involves determining the best possible way of running the business and then comparing this with the current situation to establish the cost of poor quality. This method is called best practise analysis. The latter method is usually more complicated to use, but it is has a better chance of identifying problems of a chronic nature.
The collection of data for the deviation analysis begins by collecting existing information from the accounting system, the measuring and reporting systems, and other available documentation. Information can also be obtained with relative ease by identifying individuals and units which are concerned wholly or partly with poor quality costs. They could include, for instance, inspectors, adjusters and complaints departments. In complicated situations a simple assessment of the cost of poor quality can be obtained by estimating a unit's quality costs from its failure rate.
When the documented and readily available data have been collected, the study continues with interviews of the personnel concerned. The interviews can vary in scope, from general interviews with management to detailed interviews at a lower level. These interviews can take the form of personal interviews, group interviews or questionnaires. A good way of beginning the interview is with an information and motivation phase, in which the necessary background is provided. This is followed by the data collection phase, where questions are asked about existing problems, faults and failures and estimates of their frequency. Another way of obtaining this information is to carry out a survey in the form of a measurement of limited duration. This can be carried out using a simple report form, on which employees can make daily notes of the faults and problems that occur.
In an best practise analysis, the best practise can be established by making a theoretical analysis of the process, practical studies and comparisons or by a combination of both methods. A theoretical analysis can be made by surveying and studying the process. A practical study can be carried out in the form of interviews, where employees make assessments of how their work would be done under ideal conditions, or in the form of benchmarking in which different situations are compared and the most suitable methods are identified. Benchmarking can be done internally at various levels, from individual to company level, or externally in relation to other companies.
Phase 4: Processing. Analysis of the data obtained. Proposals for improvement projects are established. Reports are drawn up for management and the units concerned. The assessment is evaluated and proposals drawn up for improving its procedures.
Measuring systems
Measuring systems can be useful for monitoring the quality level over a period of time. Here it is inadvisable, however, to attempt to introduce a measuring system which is intended to reflect the entire business. This type of work is complicated and a very high level of maturity is required among both management and personnel. Many have failed in this. Measuring systems should instead be focused on a few costs or a selected area with readily available information, for instance, production in a manufacturing company. If a well-designed measuring system is used, the measured data will be accurate. The work of developing a measuring system can be divided up into five phases.
Phase 1: Proof of the need. The company's management must first decide on whether a measuring system should be introduced. The reason for this is that it is essential for the functioning of the system that management gives it priority and constantly asks for and uses the information it provides. Developing this support may require training courses and seminars for company management. It is also useful to present the results of earlier assessments of the costs of poor quality.
Phase 2: Development. This work is most appropriately done in the form of a project. A cross-functional group is formed. The scope of the measuring system is established. It is important not to have too high ambitions, as this can lead to difficulties. It is often a good idea to begin on a small scale and then expand. Available sources of information (for instance, accounting and other measuring systems) are studied. A model for a measuring system is then created. This could be an integrated component of an already existing system or a separate system. The former is often preferable. Detailed parameters for the cost of poor quality are established. Procedures for reporting are developed. A comprehensive pilot test should be carried out to adapt the system to the conditions of the business. During the development stage, it is important that as many employees as possible feel involved in the work.
Phase 3: Training. Before the system can be implemented, all users need to be given training. The object of the training is to impart skills in the use of the measuring system and to change the attitudes of employees. This change of attitude has proved to be essential to the functioning of the system.
Phase 4: Implementation. The measuring system is not implemented until the pilot tests show positive results and the skills and attitudes of the employees are judged to be adequate. If there are any doubts, then implementation should be delayed and development and training should continue, as a failure always makes further attempts more difficult. When the measuring system has been introduced and is functioning, responsibility is transferred to a line function, which could appropriately be the financial function.
Phase 5: Measurement. Procedures should be established and responsibility decided for the supervision and maintenance of the measuring system, analysis of the data obtained (e.g. SPC), design and distribution of reports, and evaluation and improvement of the system.
APPLICATION
When the cost of poor quality is being measured in an organisation, the purpose of the study is important for deciding the method used. If the purpose is primarily to motivate long-term improvement work and make the quality concept more tangible, it is important to use a measuring method which is accepted in the organisation, so that the results will not be questioned. If the purpose is to identify problem areas and prioritise among them, the measuring method must be consistent, so that the entire organisation is analysed in the same way and sub-optimisation is avoided. If the purpose is to monitor the organisation's quality level, the measuring method must firstly have a good capability. A suitable way of carrying out work on the cost of poor quality is to begin with a simple survey, mainly using accepted parameters for poor quality costs, to make the quality concept more tangible, and to create understanding at management level. This survey is then expanded to identify and prioritise suitable improvement objects. The improvement work is begun and then followed up with the aid of a simple measuring system, which consists of appropriate poor quality cost parameters. This procedure is illustrated in a poor quality cost cycle. Parallel to this, capable measuring methods can be developed for certain key quality costs, such as rejects in production, and complaints.
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About the author:
Lars Sörqvist (MSc, MBA) is a researcher at the Royal Institute of Technology in Stockholm, where he has responsibility for the subject area of quality. He also works as a consultant with Sandholm Associates, Danderyd, Sweden.
References
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ASQC, 1987, Quality costs: Ideas & Applications, Vol 2, ASQC Quality Press, Milwaukee
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Dale B G, Plunkett J J, 1991, Quality Costing, Chapman & Hall, London
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Sandholm L, 1997, Total Quality Management, Studentlitteratur, Lund |
