2020

EXPERT ANSWERS

This month’s question

How can quality professionals help the accounting department understand and implement cost of quality (COQ)?

Our response

Quality professionals often work cross-functionally. One of the key aspects of the role requires working effectively and efficiently with personalities, and the key aspect to implementing a new process in an organization requires educating the team and setting up a process implementation time line.

Schedule a training session with accounting to help them understand COQ and how it can affect the organization’s revenue. Also, define COQ in terms of accounting and finance.

COQ is a method that allows an organization to determine the extent to which its resources are used for activities that: prevent poor quality, appraise the quality of the organization’s products or services, and result from internal and external failures. This information allows the organization to determine the potential savings to be gained through process improvements, such as training programs, to improve general workmanship and minimize human error, which contribute to increased COQ.

COQ consists of the cost of poor quality (COPQ), or the cost of nonconformance, and the cost of good quality (COGQ), or the cost of conformance. COPQ not only is caused by producing defective products, but it also includes costs related to fixing the defects. From an accounting standpoint, the cost of rework results in increased selling, general and administrative (SG&A) costs. Essentially, this means that the employee hours that could be spent working on new production orders are diverted to fixing issues associated with poor quality and workmanship.

In addition to costs associated with improving processes and training, it is important to note that the overall COQ increases the cost of goods sold and SG&A costs.

Provide the accounting department with metrics and data associated with COQ, such as:

  1. The value associated with manufacturing products that don’t meet contractually agreed on end-to-end yields.
  2. Costs don’t result from only producing and fixing failures; a high percentage of costs come from ensuring that good products are produced.
  3. COPQ affects internal and external costs resulting from failing to meet customer or user requirements, and are found before products or services are delivered to external customers.
  4. COGQ includes costs related to preventing nonconformances and appraising products or services to ensure they meet requirements.
  5. Strategic sourcing of raw materials from high-quality suppliers to minimize quality issues associated with outbound logistics.
  6. Intangible costs and loss of reputation.

The following information can be used to break down the impact in terms of profit and loss statements. Quality professionals can help identify and set up key performance indicators (KPI) to track COPQ. Internal and external failure costs can be tracked using metrics such as:

  • Rework and scrap.
  • Delays and downtime.
  • Redesign and testing.
  • Reorder of raw materials.
  • Shortages.
  • Failure analysis.
  • Downgrading.
  • Lack of flexibility and adaptability.
  • Repairing goods and redoing services for customers.
  • Customer warranties, bad will and complaints.
  • Losses due to reduced sales.
  • Environmental costs.

Along with identifying and setting up KPIs for COPQ, quality professionals can help identify areas in which to implement preventive actions to prevent producing poor quality products. These are prevention costs such as:

  • Quality planning.
  • Supplier evaluation.
  • New product review.
  • Error proofing.
  • Capability evaluations.
  • Quality improvement team meetings.
  • Quality improvement projects.
  • Quality education and training.

COGQs, such as appraisal costs, are incurred when controlling products and services to ensure high quality at all stages, and conforming to quality standards and performance requirements. Examples include costs for:

  • Checking and testing purchased goods and services.
  • In-process and final inspections and tests.
  • Field testing.
  • Product, process or service audits.
  • Calibrating measuring and testing equipment.

Quality professionals can help the accounting team identify and prioritize critical areas that must be addressed first. Specific areas of collaboration with accounting include identifying cost drivers and ensuring due diligence is performed when tracking these costs. Leveraging software tools such as PowerBI or Tableau to create interactive dashboards can provide real-time tracking of employee hours and other quality-related costs. Implementation can be a continuous improvement project for the teams, which helps implement KPIs effectively and reduce potential challenges that could arise from the accounting team.

Many COQs are hidden and difficult to identify through formal measurement systems. Only a few COPQs and COGQs are obvious, but offer a huge potential for reducing costs. Discussing the steps mentioned earlier and working collaboratively with accounting helps identify and improve these costs, and significantly reduces the costs of doing business.


Bibliography

ASQ, “Cost of Quality,” asq.org/quality-resources/cost-of-quality.

Buthmann, Arne, “Cost of Quality: Not Only Failure Costs,” ISIXSIGMA, https://tinyurl.com/y4h43z3k.


This response was written by Anusha Selvakumar, quality engineer, Arista Networks, San Jose, CA.


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