An excerpt from The Handbook for Quality Management (2013, McGraw-Hill) by Paul Keller and Thomas Pyzdek
Quality cost management helps firms establish priorities for corrective action. Without such guidance, it is likely that firms will misallocate their resources, thereby getting less than optimal return on investment. If such experiences are repeated frequently, the organization may even question or abandon their quality cost reduction efforts. The most often used tool in setting priorities for quality cost management is Pareto analysis. Typically employed at the outset of the quality cost reduction effort, Pareto analysis is used to evaluate failure costs to identify those Ã¢â‚¬Å“vital fewÃ¢â‚¬Â areas in most need of attention. Documented failure costs, especially external failure costs, almost certainly understate the true cost and are highly visible to the customer. Pareto analysis is combined with other quality tools, such as control charts and cause-and-effect diagrams, to identify the root causes of quality problems. Of course, the analyst must constantly keep in mind the fact that most costs are hidden. Pareto analysis cannot be effectively performed until the hidden costs have been identified. Analyzing only those data easiest to obtain is an example of the GIGO (garbage-in, garbage-out) approach to analysis.
After the most significant failure costs have been identified and brought under control, appraisal costs are analyzed. Are we spending too much on appraisal in view of the lower levels of failure costs? Here quality cost analysis must be supplemented with risk analysis to assure that failure and appraisal cost levels are in analysis is also used to justify expenditure in prevention costs.
Prevention costs of quality are investments in the discovery, incorporation, and maintenance of defect prevention disciplines for all operations affecting the quality of product or service (Campanella, 1990). As such, prevention needs to be applied correctly and not evenly across the board. Much improvement has been demonstrated through reallocation of prevention effort from areas having little effect to areas where it really pays off; once again, the Pareto principle in action. Examples of categorized quality costs are provided in Table 8.2. See Cost of Quality Overview for related links.
Learn more about the Quality Management tools for process excellence in The Handbook for Quality Management (2013, McGraw-Hill) by Paul Keller and Thomas Pyzdek or their online Quality Management Study Guide.