Quality Management and Quality Costs

In any discussion of quality management systems and practice, there eventually arises the question of 'quality costs'. It is distinctly pass' to be outside such a conversation, as everyone is expected to have a view, and to be involved in the measurement of such costs. But what are these costs, how are they relevant to the management of quality, and how calculated?



In the UK there have been a number of attempts to establish a formula for such calculations, each iteration having something to offer, but to the uninitiated they all lack one real feature as a national Standard - a unmistakable accounting of the why & what of such expenses.



One such costs collection mechanism involves the separation of costs associated with Prevention (of defects) from those of Failure (also of defects). The implication of such costs is that Prevention costs, if effectively managed, should lead to the reduction or even elimination of Failure costs. This is all good theory until you try to identify such costs. There is in this scenario a further category of costs - Appraisal, but including this group only adds confusion to the process.



Imagine an organisation that manufactures a domestic product, say a dishwasher. This organisation like any other has to purchase some items from other suppliers, and as the procured items arrive at the facility they are processed to ascertain their acceptability. Clearly the labour involved in this assessment process has to be paid for, and yet it contributes nothing to the final dishwasher. Because the product evaluation appears to have some value in preventing defective items arriving at the production location, these costs are typically assessed as Quality Costs. But are they Prevention Costs or Failure Costs? One way of thinking defines them as prevention, as they prevent these defective items from ever getting to the product assembly line. An alternative view is that they are in fact failure costs, because if the products were as required, and there was a certainty within the organisation of the suppliers ability to deliver acceptable products, then this product inspection would be unnecessary. Therefore, the lack of success rests with the procurement people who have not properly managed the acquisition and implementation of acceptable suppliers.



This debate can go on for an eternity - without conclusion, and some other system for identifying and delegating costs is still needed. The real purpose of cost measurement is surely to facilitate cost reduction, and the removal of the arcane distinction between one cost group and another is a first step to success. Transaction Costing is the mechanism for achieving this objective, where the costs additional to those reasonably expected for an effective process are identified and collected. Transaction costs analysis is a process reasonably free from the debate that surrounds any quality cost assessment, and provides a direct measurement of the 'hidden' costs of any operation or transaction. It forces the organisation to examine current practices, and make decisions regarding directly measured costs that could be removed from the business. It doesn't make the removal any easier, but it does ensure that costs are correctly allocated to the inefficiencies they represent, leaving business managers free from the confusion created by the quality costs structure, and with unambiguous evidence of the cost of inefficient practices prevalent in their organisation.





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Ed Bones formed Meon Consulting to assist clients with managing their businesses in a manner compliant with ISO 9001/14001. Ed had earlier held a number of senior positions with big companies in the UK, Europe and the USA. He has written and delivered lectures on quality improvement and TQM. http://www.rent-an-auditor.co.uk. Please visit http://www.rent-an-auditor.co.uk/contactus.html to obtain your FREE copy of the Presentation.