Quality Management: Transitioning To Financial Quality Measurement

COQ Impact on Profitability Quality Blue Book Like its financial counterpart, the Quality Blue Book contained three pages of indices presenting actuals vs. goals, previous period comparisons, and three-month forecasts. Unlike the highly structured Financial Blue Book, however, the Quality Blue Book performance indices were generally determined by the responsible PCC manager. This allowed managers to tailor the report to reflect the key quality indicators in each business. Performance indicators for the unit are defined in Exhibit 1. Cost of Quality Cost of Quality (COQ) was one of the performance measures that had to be included in every business unit's Quality Blue Book. COQ represented expenditures that arose because poor quality had occurred or to prevent poor quality from occurring in the future. The COO, measure was designed to highlight the cost of poor quality, the cost of doing things wrong. Explained J. Fred Bucy, TT's President and Chief Operating Officer, in a statement to the company's employees: Some people think that quality costs money, because they see the costs of quality in terms of new testing equipment, added inspectors, and so on. But these are the costs of doing it wrong the first time. If we design a product right the first time, and build it right the first time, we save all the costs of redesign, re-work, scrap, re-testing, maintenance, repair, warranty work, etc. Consider how much of your time is spent in doing something over again. How much of your assets are tied up in re-work, re-testing, repair, and making scrap? How much material is wasted at TI? If we could eliminate these costs by doing things right the first time, we would have true People and Asset Effectiveness, and improved prof-itability, without having to add a dollar to billings. The Cost of Quality system was a key component of the "Total Quality Thrust." By measuring quality in financial terms, the COQ system allowed M&C management to create a major cultural change by using terms familiar to everyone the bottom line. Tom Haggar, Controller of the Metallurgical Metals Division, observed: COQ ties quality progress into what we're here for—to be a profitable world class manufacturer constantly improving quality. COQ numbers shocked PCC managers. We initially showed them COQ figures of 10%: 10% of sales value, and an even greater percentage of profits, down the hole. It is now down to a less shocking 4-5%. Managers are saying that they haven't found all of the costs but that the trend is right. Implementation of the COQ system began in the fourth quarter of 1981 when the Quality Department undertook a quick top-down exercise to determine quality costs. By the following quarter, an on-going system based on accounting data was in place. At present, Control and Finance provided the PCC's Quality Department with data from the accounting system on the sixth working day following the close of the month. The Quality Department then processed this information into the Quality Blue Book. The initial list of COQ variables included 77 items, a number that had since been reduced to 19 through the elimination of semantic overlaps between divisions and the merger of insignificant categories into other cost elements. The variables were grouped into four broad categories: 1. Prevention Costs—Costs incurred to prevent non-conforming units from being produced 2. Appraisal Costs-Costs incurred to ensure that materials and products that failed to meet quality standards were identified prior to shipment. 3. Internal Failure Costs-Scrap costs and costs incurred in correcting errors caught at appraisal, before delivery of the product to the customer. 4. External Failure Costs-Costs incurred in correcting errors after delivery of the product to the customer. The variables included in each category differed somewhat among PCCs, depending upon the nature of the business. The cost elements utilized by the Motor Controls PCC are shown in Exhibit.