Total quality management requires commitment and persistence. Quality will always have a cost, but many companies are demonstrating that investments in quality always provide returns. Cost-of-quality reporting essentially views costs of quality as "good" costs and "poor" costs. The "good" costs are those incurred by the company in delivering customer satisfaction. The "poor" costs arise from:
- Situations that create customer dissatisfaction or
- Processes that create satisfaction through an inefficient process
- Looking for failures and then correcting them is not the most efficient way to reduce COQ
The objective is to minimize and eliminate the poor costs of quality and manage the good costs to an appropriate level. In addition, this effort:
- Increases customer focus by channeling costs of quality to those activities that create value from a customer perspective
- Tracks the results of improvements in the processes that ensure quality of the company's products and services
- Increases focus on reducing cost-of-quality by improving business processes and reducing non-conformance costs
Activity-based information systems provide the opportunity for a broad number of ad hoc and ongoing reporting capabilities. Cost-of-quality is proving to be one of the most valuable of these reports. As companies continue to implement total quality management programs, there is the growing recognition of the need to track the economic as well the operational improvements being gained.
Cost-of-quality reports build naturally from an activity-based cost information system. The numbers needed are not readily available from traditional general ledger accounts. If an ABC system is not in place, the cost-of-quality report must be generated on an ad hoc basis. This will be difficult to do, because traditional accounting systems do not have this information.
Here are some steps to take to improve your company's quality process:
Examine internal failure costs – After completion of a unit, it is tested for functionality and conformance with specified quality standards. Testing failures drive further costs. These testing, rejection, rework and scrap costs are part of the company's internal failure quality costs and generally arise because of expediting and schedule changes that must be implemented because of errors in marketing, planning, purchasing or some other area of the company. They are incurred before an external customer receives the product.
Evaluate external failure costs – If a customer receives faulty or nonperforming products, it is classified as an external failure. These costs are classified on an ongoing basis as warranty costs, field repairs, returns and replacements. They are incurred whenever an external customer is not satisfied. While these costs can be identified and grouped for decision makers, the more significant issue is their effect on the company's reputation, future sales and market share.
Quantify the costs of quality – Identify the activities that need to be grouped into the cost-of-quality report and build them into the information system whenever possible.
Analyze and improve cost-of-quality performance – When used properly, COQ can be used to prevent costs from increasing and highlight areas with high potential for cost reductions.
For more information on this topic, download KnowledgeLeader’s benchmarking tool Implement Total Quality Management Key Performance Indicators (KPIs).