Strategy for Reducing Quality Costs

An excerpt from The Handbook for Quality Management (2013, McGraw-Hill) by Paul Keller and Thomas Pyzdek

As a general rule, quality costs increase as the detection point moves further up the production and distribution chain. The lowest cost is generally obtained when non-conformances are prevented in the first place. If non-conformances occur, it is generally least expensive to detect them as soon as possible after their occurrence. Beyond that point there is loss incurred from additional work that may be lost. The most expensive quality costs are from non-conformances detected by customers. In addition to the replacement or repair loss, a company loses customer goodwill and reputation. In extreme cases, litigation may result, adding even more cost and loss of goodwill.

Another advantage of early detection is that it provides more meaningful feedback to help identify root causes. The time lag between production and field failure makes it very difficult to trace the occurrence back to the process state that produced it. While field failure tracking is useful in prospectively evaluating a “fix,” it is usually of little value in retrospectively evaluating a problem.

The accounting department bears primary responsibility for accounting matters, including cost of quality systems. The quality department’s role in development and maintenance of the cost of quality system is to provide guidance and support to the accounting department.

The cost of quality system is an integrated subsystem of the larger cost accounting system. Terminology, format, etc., should be consistent between the cost of quality system and the larger system to speed the learning process and reduce confusion. The ideal cost of quality accounting system will simply aggregate quality costs to enhance their visibility to management and facilitate efforts to reduce them. For most companies, this task falls under the jurisdiction of the controller’s office.

Quality cost measurement need not be accurate to the penny to be effective. The purpose of measuring such costs is to provide broad guidelines for management decision-making and action. The very nature of cost of quality makes such accuracy impossible. In some instances it will only be possible to obtain periodic rough estimates of such costs as lost customer goodwill, cost of damage to the company’s reputation, etc. These estimates can be obtained using special audits, statistical sampling, and other market studies. These activities can be jointly conducted by teams of marketing, accounting, and quality personnel. Since these costs are often huge, these estimates must be obtained. However, they need not be obtained every month. Annual studies are usually sufficient to indicate trends in these measures.

See also: Management of Quality Costs for continuation; 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.