www.btaplus.ca 1. Cost of quality definition 2. Measuring costs of non-quality 3. Managing cost of quality ISO 9000 Cost of Quality © BTA PLUS 2010 Quality experts estimate that non-quality entails costs that can reach up to 20% of manufacturing sales and 30% of operating cost for service companies. Organizations that measure the cost of non-conform and inefficient activities and that improve in eliminating their causes have achieved cost reductions amounting to 10% or more of revenues. MEASURING COST OF QUALITY WITH ISO 9000 FAMILY 1. Cost of quality definition In the 21st century, the cost of quality of an organization means to measure the cost of complete realization to satisfy customer throughout the business processes. The full quality cost involves: 1) Opportunity quality costs; 2) Investment quality costs; 3) Non-quality costs. 1) The opportunity quality costs are related to the avoided capital cost, opportunity cost of additional volume if supported by sales and operations capacity due to an increased customers orders and improved process efficiency. 2) The investment quality costs are the cost for prevention and appraisal. These costs involve the resources needed to implement and to maintain ISO 9001 system to assure integrity of product realization and service provision. The prevention and appraisal costs involve all processes of quality management system. 3) The full non-quality costs are the costs of internal and external non- conformities, and the costs of ineffective and inefficient activities (non only product non-conformities costs). The costs of internal non-conformities and the costs of inefficient activities occur prior to delivery: administration, information system, marketing, sales, engineering, production, inventory, service provision, purchasing and delivery preparation. The external non- conformity costs occur after delivery to customers: product recalls, customers’ returns, compensation and replacement under warranties, installation errors, billing errors, cost of lost customers and markets, cost of repairs, time for the correction, waste time resulting of inefficient activities ISO 9004:2009 . 4. Six sigma approach
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1. Cost of quality definition
2. Measuring costs of non-quality
3. Managing cost of quality
ISO 9000Cost of Quality© BTA PLUS 2010
Quality experts estimate that non-quality entails costs that can reach up to 20% of manufacturing sales and 30% ofoperating cost for service companies. Organizations that measure the cost of non-conform and inefficient activities
and that improve in eliminating their causes have achieved cost reductions amounting to 10% or more of revenues.
MEASURING COST OF QUALITY WITH ISO 9000 FAMILY
1. Cost of quality definition
In the 21st century, the cost of quality of an organization means to measurethe cost of complete realization to satisfy customer throughout thebusiness processes. The full quality cost involves:
1) Opportunity quality costs;2) Investment quality costs;3) Non-quality costs.
1) The opportunity quality costs are related to the avoided capital cost,opportunity cost of additional volume if supported by sales and operations
capacity due to an increased customers orders and improved processefficiency.
2) The investment quality costs are the cost for prevention and appraisal.These costs involve the resources needed to implement and to maintainISO 9001 system to assure integrity of product realization and serviceprovision. The prevention and appraisal costs involve all processes ofquality management system.
3) The full non-quality costs are the costs of internal and external non-conformities, and the costs of ineffective and inefficient activities (non onlyproduct non-conformities costs). The costs of internal non-conformities
and the costs of inefficient activities occur prior to delivery: administration,information system, marketing, sales, engineering, production, inventory,service provision, purchasing and delivery preparation. The external non-conformity costs occur after delivery to customers: product recalls,customers’ returns, compensation and replacement under warranties,installation errors, billing errors, cost of lost customers and markets, costof repairs, time for the correction, waste time resulting of inefficientactivities ISO 9004:2009 .
4. Six sigma approach
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When the costs of non-quality are displayed in finanterms and they are part of management indicators is vhelpful for top management to take actions. Analysisthese results can provide opportunities for improvemcan facilitate adequate use of resources and can initpreventive and corrective actions for elimination of ro
causes of major problems. It is practical to implement measurement of quality costs for material, informatinventory and business processes of organization. Tquality costs management focuses on reduction of nquality cost and on improvement of process efficiency
2. Measuring cost of non-quality
Measure correctly to manage correctly! The measurementof non-quality costs is an extraordinary tool for themanagement of performance of business processes. Non-quality costs are powerful management indicator for
quality improvement and for initiation of preventive andcorrective actions. Quantifying the non-quality costs infinancial term can be difficult because in majority of theorganizations these costs are not measured by thetraditional accounting system. Implementation of ISO9001:2008 system is a good foundation for the cost andefficiency measurement.
The cost measurement methodology can be described in aprocedure table of management indicators related to thepriorities and importance of problems, nonconformingproduct and process, insufficient resources, customers’
returns, customer loss or customer’s claims. Quantifyingand reporting these nonconformities in dollars is crucial for the analysis of data related to the customer satisfaction,process performance, supplier delivery and quality ofproduct.
3. Managing cost of quality
The ISO 10014:2006 standard for realization of financial andeconomic benefits recommends “effective management
of resources and implementation of applicable processesfor improving the overall worth and health of theorganization. Financial benefit is the result of
organizational improvement expressed in monetary form,and realized by cost-effective management practiceswithin the organization”. The table 1 illustrated a list offinancial benefit that can be achieved with effective cost-effective management.
Measurement of cost of non-conformities and inefficientactivities with management indicators in dollars is possibleand can be integrated in the ISO 9001:2008 qualitymanagement system. Such an integration will provides tomanagement review and to management committee
relevant data for the performance of processes andefficiency of resources: non-quality cost of product,processes and resources: ineffective time, overtime, wasteof resources, excessive inventory, high turnover, frequentemployees departures, efficiency of processes andproducts.
ISO 10014: The financial benefits of
cost and efficiency management
Improved profitability
Improved revenues
Improved budgetary performance
Reduced costs
Improved cash flow
Improved return on investment
Increased competitiveness
Improved customer retention
Improved decision making
Effective use of available resources
Heightened employee accountability
Improved intellectual capital
Effective and efficient processes and supply chain
Reduced time to market
Table 1
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4. The Six sigma approach
According to the old approaches for costs of qualityevaluation, the 4-sigma level was the optimum balancebetween prevention cost and non-quality cost. 4-sigmaquality is quantified, as 6,210 defected parts per million(ppm) and the non-quality can exceed 15%-20% of sales
revenue.The companies like Motorola, Honeywell, GeneralElectric, Lockheed Martin, Texas Instruments, Bank ofAmerica, Bank of Montreal and many others has provedthat the investment in human resources training onquality can be rewarded 100 times better and themaximum level is 6-sigma. Six-sigma quality is quantifiedas 3.4 ppm and the non-quality costs are less than 4 % ofsales. Motorola succeed to reduce cost of non-qualitydown to 2.5 percent of sales, compared to the averaged3.1 percent of sales for the manufacturing companies
who are recipients of national quality award. Defect rateis only 52 ppm, or 5.38 Sigma. Manufacturing cycle time(book to bill) measure for subscriber equipmentdecreased from 3.25 days to 2.4 days for 3 years.Employee productivity measured as sales per employee,increased 32 % over the same period of time.
5. Achieve impressive results
The complete quantification of non-quality cost leads toreal cost reduction. Organizations that measure non-quality and inefficiency cost and provide strong
leadership to eliminate their causes, have achieved costreduction amounting to 10% and more of revenues andhave increased customer satisfaction and retention. Thisis even more relevant in times of business stress anduncertainty when the speed and the commitment surpassthe slowdown, recession and stagnation. In a good timewhen the solid economic growth is in the horizon, world-class businesses that measures cost of quality (non-quality is less than 4% from sales) can afford increasingsearch and development, elevated customers needs,aggressive global competition and market pressure. Costof quality management is a generator of improvementactions focused to improve the business performanceand to reduce waste of resources and departures of besttalents. The results are: impressive saving and realizationof economies, increased customer satisfaction, improvedrevenues and better operating margins.