COST OF QUALITY
The Language Of Value
A new American National Standard aligns cost of quality with management systems
by Denise Robitaille
Last year, ASQ published Technical Report (TR) 2:2018—Cost of quality—guidelines for development, implementation and monitoring to improve quality and performance.1 It is the first American National Standard developed under the custodianship of the ASQ Quality Management Division (QMD).
The cost of quality (CoQ) has long been a reliable method of calculating the efficiency of an organization by monetizing drains on resources. There is a symbiotic relationship between the containment of costs related to quality and consistent fulfillment of customer requirements.
Analyses over time support the premise that the more assiduously an organization addresses the costs related to mitigating poor quality, the fewer obstacles arise to achieving customer satisfaction. Costs associated with rework, wasted time and warranty replacements all undermine customer satisfaction and erode the bottom line.
Actions for mitigating these costs may, in and of themselves, engender financial expenditure. However, when these actions are taken, organizations often experience improved delivery performance, a decrease in costly rejects, and reallocation of resources away from firefighting activities toward innovation and initiatives to enhance service to the customer.
Aligning with ISO 9001:2015
The timing of this new TR was serendipitous. Its focus dovetailed with the new ISO 9001:2015 requirements relating to “… ensuring the integration of the quality management system (QMS) requirements into the organization’s business processes …”2 In short, the business of the organization and the business of managing the organization’s QMS must be integrated.
Additionally, ISO 9001:2015 introduced the concept of risk-based thinking. Most risks can be monetized and all have different levels of relevance to meeting customer requirements.
The developers of TR2:2018 recognized the synergy to be achieved by aligning with ISO 9001. The report’s framework is based on the high-level structure for management system standards now found in the International Organization for Standardization's (ISO) directives and adopted by multiple management system standards, including ISO 9001:2015, ISO 14001:2015, ISO 45001:2018 and AS9100D:2016.
TR2:2018 was issued as a TR—meaning its purpose is to provide guidance. That is, it does not define requirements and is not intended for certification. Like many other standards, its purpose is primarily to inform and establish guidelines that enhance the understanding and effective implementation of requirements and business practices. These, in turn, eventuate the goals of customer satisfaction, improvement and sustainable success.
The guidance provided shows how costs related to quality are enmeshed in all its clauses and—by extension—the QMS requirements. It fulfills its intent of identifying costs, defining methods of monitoring and measuring, and providing tips on actions to take.
It’s also important to remember that QMS requirements are generic because they are intended for a broad spectrum of users with varying degrees of complexity, sophistication and access to analytical tools. TR2:2018 facilitates small and medium enterprises’ abilities to understand and fulfill ISO 9001 requirements relating to integrating a QMS into business practices. Identifying internal and external issues and interested parties, along with the risks and opportunities they represent, can be parsed more easily and justified through the use of CoQ tools.
Costs and business
TR2:2018 guidance facilitates QMS integration into an organization’s strategic planning. ISO 9001:2015 puts a greater emphasis on ensuring business processes are aligned with the QMS and establishing effective monitoring and measurement practices. If these are to be relevant to the organization's strategic direction, they must be implemented in a way that makes that link evident and useful for decision making.
An often-articulated axiom is that money (or accounting) is the language of business. It is the filter through which top management sifts the information it needs to make responsible decisions about strategic planning, such as acquisitions, resource deployment, budgeting and staffing. Often, money also is deemed a reasonable quantifier of value.
Consider W. Edwards Deming’s fourth principle: End the practice of awarding business on the basis of price alone.3 Quantifying cost is more complex than simply noting the price paid per piece. For example, what risk is associated with purchasing a cheaper product without also incurring the cost of conducting a rigorous assessment to ensure that the fit-for-use is comparable to a competitor’s product that already has a track record of high performance? When using money as a measurement of value, it’s important to have the data to adequately calculate and comprehend the full cost.
Money also is a measurement of achievement. Being able to demonstrate your contribution to the bottom line through cost-saving initiatives often is a source of recognition. If the cost only has been shifted to another department, however, the recognition is undeserved. This is where the process approach quality principle comes in.
System-based thinking is an integral component of the process approach. It states that: “Consistent and predictable results are achieved more effectively and efficiently when activities are understood and managed as interrelated processes that function as a coherent system.”4 Therefore, costs and cost savings should be similarly interrelated. An effective CoQ method should support the alignment of processes to address costs throughout management system processes.
To facilitate comprehension and implementation of CoQ practices, TR2:2018 was developed using the high-level structure found in ISO 9001 and other aforementioned management system standards. The sidebar “Cost of Quality in TR2:2018” lists excerpts from the report’s table of contents that illustrate how the CoQ is embedded in each section.
Cost of Quality In TR2:2018
These entries from the Technical Report (TR) 2:2018 table of contents illustrate how the cost of quality (CoQ) is woven throughout the report. Italicized entries identify the systemic nature of effective CoQ initiatives.
4. Context of the organization.
4.1 Understanding the organization and its context.
4.2 Understanding the needs and expectations of interested parties.
4.3 Determining the scope of the CoQ—management process.
4.4 CoQ—management process and its sub-processes.
6.1 Actions to address risks and opportunities.
6.2 CoQ—objectives and planning to achieve them.
6.2.1 Alignment to quality objectives.
6.3 Planning of changes.
8.1 Operational planning and control.
8.1.1 Internal failure costs.
8.1.2 External failure costs.
8.1.3 Appraisal costs.
8.1.4 Prevention costs.
8.1.5 Application to internal processes.
8.1.6 Inputs and controls.
8.1.8 Application to downstream stakeholders.
8.1.9 Application to external providers.
8.1.10 Supply vendors.
8.1.11 Outsourced processes, products and services.
8.1.12 Downstream customers or partners.
Throughout the report, the CoQ and methods of addressing it are identified. It also identifies four unique costs and provides examples for each category:
- Internal failure costs.
- Computer problems.
- Cyber, data and physical security breaches.
- Loss of data.
- Excess material use.
- Rework, reinspection and retesting.
- Sorting and extra operations.
- Extra inventory as safety stock.
- Cost of returning supplier rejects.
- External failure costs.
- Processing customer complaints.
- Handling and price adjustments related to failure.
- Recall and retrofit costs.
- Warranty service costs.
- Liability insurance and awards.
- Loss of reputation and goodwill.
- Loss of customers.
- Redispatching a service technician to address previous deficiencies.
- Nondelivery of service due to equipment failure.
- Engineering changes and tool modifications.
- Appraisal costs.
- In-process and final inspection and testing.
- First-piece and setup inspection.
- Source inspections.
- Samples and sample preparation.
- Acquisition cost of inspecting and testing equipment and facilities.
- Independent lab testing or certification.
- Monitoring service calls.
- Prevention costs.
- User focus groups.
- Maintaining and improving the management system.
- Preparing and maintaining control plans.
- Design review.
- Process capability and process validation studies.
- Statistical process control.
- Preventive maintenance.
- Prevention cost.
Finally, bringing the concept of CoQ to the management review process brings light to the issues, risks, status of objectives, performance indicators and improvements in a manner that creates value for top management. It facilitates the decision maker’s ability to objectively assess costs and effectively determine what actions will be of the greatest benefit to the organization and its customers.
ASQ TR2:2018 was conceived with the intent of providing guidance on identifying the CoQ, developing appropriate monitoring and measuring methods, and implementing activities to improve the CoQ. The guidance supports QMS standards in the alignment of quality costs with quality management processes.
The QMD is responsible for the manager of quality/organizational excellence certification and its corresponding body of knowledge. Sponsorship of this document by the QMD allows for enhanced visibility of the synergy between financial burden and deployment of effective QMS processes and practices. It is well-positioned in the QMD’s treasure trove of resources relating to monitoring and measuring techniques. Adding this standard to the division’s portfolio enhances the services it provides to its members. Using this standard will help organizations experience greater effectiveness and efficiency of their QMSs.
- ASQ, ASQ TR2:2018—Cost of quality—guidelines for development, implementation and monitoring to improve quality and performance, ASQ Quality Press, 2018.
- International Organization for Standardization (ISO), ISO 9001:2015—Quality management systems—requirements, clause 5.
- ASQ, “Learn About Quality: Deming’s 14 Points,” https://tinyurl.com/y48l45zd.
- ISO, “Quality Management Principles,” https://tinyurl.com/y4vcqee4.
Denise Robitaille is the author of 12 books, including ISO 9001:2008 for Small and Medium-Sized Businesses (ASQ Quality Press, 2010) and is an internationally recognized speaker and trainer. She is chair of Project Committee 302, which revised ISO 19011, and an active member of USTAG to ISO/TC 176. As a member of the ASQ Standards Committee, she championed the development of ASQ TR2 on cost of quality. Robitaille is an ASQ Fellow and an Exemplar Global certified lead assessor.