Quality Management: Nonfinancial Quality Measures For Holistic Assessment

Limits of COQ All these costs are currently being recorded somewhere in the company's cost system; the costs do not include unrecorded or opportunity costs (such as lost future sales) or the difficult-to-measure costs of disruption caused by out-of-specification purchased materials and produced goods. The goal of a Cost of Quality measurement exercise is simply to identify how much the organization is currently spending on quality. Most companies are surprised to learn that they are currently spending between 15% and 20% of sales revenue on quality-related costs. This figure can then be used as the lever to get top management's attention that perhaps this large amount can be reduced significantly by a wiser allocation among the four quality categories. In particular, companies that have been paying little attention to quality, choosing implicitly to inspect quality in rather than to design it in, incur large costs in the internal and external failure categories (fixing bad items after they have been built. They also spend heavily in the appraisal category. One semiconductor company adopted a total quality control program after it estimated that it would need more inspectors than workers to achieve, under current operating procedures, the quality levels demanded by its customers. An electronics instrument company learned that it was far cheaper to detect and replace a faulty two-cent resistor at the start of the production process than to repair and perhaps replace the $5,000 piece of equipment containing this part, after the instrument had been installed at the customer's site. Such companies discovered that by spending more in the Prevention category, they could greatly reduce the amount spent in the Internal and External Failure categories. As product design, vendor relations, and process control improved (again by increasing investments in Prevention), the company could also substantially reduce the costs it incurred in the Appraisal category. Far less inspection was required once quality was designed into products and processes. Thus, by monitoring total Costs of Quality and their distribution among the four categories, a company could assess the decline in total quality costs as it shifted efforts from inspection and repair back into prevention. While Cost of Quality measurement is attractive when used in the above fashion, it cannot be the sole basis for monitoring a TQC effort. First, there is no longrun target for the "optimal" level of quality costs. While spending 15% to 20% of sales dollars on quality-related costs is clearly excessive, the optimal level for Cost of Quality spending is unknown and undoubtedly varies from company to company. Companies have found that they can drive quality costs down to about 5% of sales, but further reductions may be counterproductive. Also, while there are high payoffs from initially shifting quality costs from the Appraisal, Internal Failure, and External Failure categories to the Prevention category, the most desirable distribution among these four categories is unknown. Furthermore, the allocation of quality costs in and among the four categories is a subjective exercise that requires reasonable but still arguable judgments. Thus, the data provide a useful managerial summary of quality efforts and pro-gress, but they probably do not provide a good basis for performance evaluations. However the existing costs are aggregated among the four Cost of Quality categories, the total cost of producing bad-quality items will still be underestimated. Omitted from the calculation are the costs of disruption in operations caused by outof-conformance purchases and production, and the loss of sales caused by actual external failures and associated setups, and engines. While some of the cost of production scheduling, setups, and engineering change orders can be assigned to one or more of the categories, the implicit cost of factory confusion and excessive inventory levels may be difficult to track down. In summary, the Cost of Quality measurement appears to be valuable as an attention-getting, public relations effort for senior management; to make them aware of, first, how much the company is currently spending to produce out-of-conformance items and, second, how by reallocating effort from detection and repair categories to prevention, it can realize substantial benefits. But nonfinancial quality measures (e.g., yield, PPM defect rates-both internal and external, and measures of scrap, rework, and unscheduled machine downtime) are also needed to provide more timely, objective feedback and as better targets for quality improvement efforts.