July 2002
Volume 9 • Number 3

Contents

An Activity-Based Costing Model to Reduce COPQ
by V. M. Rao Tummala, Eastern Michigan University, K. S. Chin, City University of Hong Kong, and W. K. John Leung, Motorola Semiconductor

Based on company practices and costs of poor quality (COPQ) models formulated by others, an activity-based costing program is introduced in this article to identify the opportunities to develop and implement appropriate improvement projects to reduce the costs of poor quality and increase the quality of products and services. This program consists of three phases: determining the COPQ, initiating improvement projects, and evaluating the improvement projects. These three phases, in turn, involve 12 steps. The purpose of these steps, along with the techniques used in each step to accomplish the required activities, is explained in this article. Also, a case study of an analog integrated circuit test operation is used to apply the proposed program in identifying the opportunities and initiating appropriate improvement projects to reduce the costs of poor quality. The results of the case study show that the program can be applied to benefit the companies in reducing the costs of poor quality and, hence, increasing the quality of processes, products, and services. Also, the proposed program can be used to assess the need for further improvement projects.

Key words: activity-based costing, models, costs of poor quality (COPQ), improvement projects

INTRODUCTION

J. M. Juran believed that a new approach was needed for quality control departments to sell their quality programs to management. Consequently, he introduced the concept of costs of poor quality (COPQ) (Juran and Gryna 1988). Armand Feigenbaum (1991), like Juran, also proposed the costs of quality concept to secure commitment from senior management to develop and implement quality improvement projects. In fact, he explained that they are central to management and engineering of modern total quality control, as well as to business strategy planning. According to Philip B. Crosby (1979), the COPQ is a blessing and serves the unique purpose of focusing attention on quality management when used as a management tool. He considers “everything that would not have to be done if everything were done right” as the price of nonconformance, and sees nonconformance as a bacteria that must be treated with antibodies to prevent problems from recurring (Crosby 1984).

Many companies followed the teachings of Juran, Feigenbaum, and Crosby. They implemented COPQ programs and achieved considerable savings. For example, The U. S. Customer Operations division (USCO) of Xerox, in four years, saved more than $200 million when it implemented costs of quality programs ($53 million in 1989, $77 million in 1990, $60 million in 1991, and $20 million in 1992) (Carr 1992). Similarly, Tenneco decreased its failure costs from $2.9 billion to $1.8 billion, resulting in an increase in operating income of $900 million in six years due to the improvements made through its costs of quality strategies (Feigenbaum 1997). Westinghouse has managed to increase its productivity by 15 percent, reduce scrap by 58 percent, improve cycle by 66 percent, decrease returns by 69 percent, and improve service performance by 20 percent (Gupta and Campbell 1995). Similarly, Motorola boasted savings of $942 million in three years (Butler 1997). The Federal Communications Commission (FCC) formed quality improvement teams involving internal and external customers in implementing a seven-step problem-solving process and realized a COPQ reduction by 67 percent (Fontaine and Robinette 1994). Thus, these organizations have demonstrated that implementing programs based on costs of quality reduces production, design, and development costs because money is no longer spent on waste and rework, and the savings can be reinvested in acquiring new technologies and reducing the cost to customers.

Juran (1989) defined the COPQ as those costs incurred because of poor quality that would not have been incurred if every aspect of a product or service were perfectly correct the first time and every time—no deficiencies. These COPQ include internal failure costs, external failure costs, appraisal costs, and prevention costs. Feigenbaum (1991), on the other hand, divided the COPQ into two major categories, namely, costs of control (prevention and appraisal costs) and costs of failure of control (internal failure and external failure costs). Similarly, Crosby (1979) defined them into costs of conformance (prevention and appraisal costs) and failure costs (internal and external failure costs). Others called them costs of conformance (prevention and appraisal costs) and costs of nonconformance (internal and external failure costs) (Louisiana State University 1997). Regardless of how COPQ are identified, companies must understand them and examine the sources of their occurrence and initiate COPQ programs to reduce the costs of quality.