Avoidance/Failure Costs Reversal: An Action Plan

Article

Grimm, Andrew F.; Fox, James G.   (1987, ASQC)   C&F Stamping Co., Grand Rapids, MI

41st Annual Quality Congress, May 1987, Minneapolis, MN    Vol. 41    No. 0
QICID: 3368    May 1987    pp. 688-695
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Article Abstract

Traditional quality cost reporting models generally use the breakeven analysis approach to measure whenthe margin between the "dollar earned" equals the "dollar spent." This model works well whena firm institutes a quality cost reporting system to measure its historical quality cost base before implementing a comprehensive quality control program. In this scenario, companies usually find that the total failure cost area remains in an essentially level, high cost opertional situation, and avoidance costs remain in a significantly level, low cost operational situation. Further, when observing the Appraisal Costs/Prevention Costs ratio within the avoidance costs area for a firm in this stage, Appraisal Costs are usually appreciably greater than the expenditures for prevention. This firm can logically use the breakeven analysis approach to managing quality through quality cost control. It can realize significant gains toward the breakeven point where one dollar spent on avoidance will equal one dollar of total failure cost reduction.On the other hand, a dilemma arises for the firm that decides to install a comprehensive quality control program using all of the respected techniques such as SQC, SPC, Quality Function Deployment, Total Quality Control, and so on before determining the quality cost structure that results from such a program. At some point, this firm realizes that it must determine the economic effects and results of the program. Quality cost reporting is a method that can analyze the new program's impact on the business. The dilemma found in this scenario is that expenditures for avoidance far outweigh the corresponding expected reductions in Total Failure Costs. This dilemma was found in our company. We discovered that we were spending at a much higher level in the Avoidance Cost area than the level at which the failure costs were being generated. In fact, the total failure costs were very significantly lower than the avoidance costs which generated a significantly important negative margin.The intent of this paper is to discuss the traditional quality cost reporting method, explore the negative margin dilemma as we discovered it functioning in our operations and to discuss a variety of strategies that may be employed to address and resolve this dilemma. These strategies should ionclude the use and appreciation of the traditional quality cost reporting system as well as exploring new approaches to Quality Cost Accounting.


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