Benefits of Quality Cost Reduction

An excerpt from the Handbook for Quality Management (2000, QA Publishing, LLC) by Thomas Pyzdek

Quality cost reductions can have a significant impact on growth rate and bottom line for an organization. Research done by the Chicago Graduate School of Business showed that companies using TQM for an average of 6.5 years increased revenues at an annual rate of 8.3% annually, versus 4.2% annually for all U.S. manufacturers. Suminski (1994) reports that the average price of nonconformance is 25% of operating costs for a manufacturer, for service businesses the figure is 35%. These costs represent a direct charge against profitability. A New England heavy equipment manufacturer reports that their price of nonconformance was 31% of total sales when they undertook a quality cost reduction project. In just one year they were able to lower these costs to 9%. Among their accomplishments:

·      Scrap and rework reduced 30%.

·      Manufacturing cost variance reduced 20%.

·      Late collections reduced 46%.

·      Average turnaround on receivables reduced from 62 days to 35 days.

See also: Cost of Quality Overview for links to related topics.

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.