Manufacturing Cost of Quality

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To remain competitive, a company must benchmark its operations and compare them with expectations in the marketplace. It must measure and track anything that could pinpoint a problem or a trend. It must identify and prioritize opportunities for improvement. It must monitor the progress of change activities, validate the changes, and make them permanent.

This paper will discuss practical, effective performance measurements. It will emphasize the development of the Cost of Un-Quality and the use of this measurement to motivate, identify, prioritize, and monitor improvement activities.

Why Measure?

A good definition of crazy is to keep doing the same thing, while expecting to get a different result. In an increasingly competitive environment, improving our response to the marketplace requires that we change some part of our operations. We need to develop relevant and agreed-on measurements to guide good decisions on what to change and on what to change to.

Intuition is only effective and accepted in dealing with relatively simple organizations and processes. In a complex manufacturing environment, it is difficult to find the underlying cause of a poor result, or project the actual outcome of change efforts. Often, the best we can do is change one thing at a time and see what effect it has.

In any hierarchical organization, we must have some rational justification for changing things. Today, we must even justify leaving things alone. Therefore, it is essential that a company begin to measure and track activities that could pinpoint a problem or identify a trend.

The Cost of Quality

During the 1980s, significant market share was captured in various industries by companies who achieved a high degree of quality. Many managers tried to justify to themselves and to their bosses moving to a similar dedication to quality. All the popular gurus and literature urged them to develop the Cost of Quality, as a first step. One definition of this is the sum of the cost of conformance plus the cost of non-conformance". This number was supposed to motivate everyone to accept the expenses and effort necessary to upgrade the operation.

Unfortunately, the very name made management view quality as a cost. Also, most organizations were never able to make any direct link to tangible Benefits of Quality. The oft-quoted phrase "Quality is free!" had a surprise addition: "It's the cost of getting there that's expensive."

Management bonuses, shareholder dividends, and job security depended on equaling or increasing last quarter's profits. Any additional expense or investment for quality couldn't show offsetting financial benefits. Proponents of quality for its own sake quickly learned they had little support. If they became too aggressive, their views were career-threatening.

Now, in the 1990s, we see examples of large and small companies who have not only survived by using a quality approach, but have even reversed the negative trends in some industries. Motorola sells pagers in Japan. Ford says, "Quality is Job 1," and is

profitable. Honda converted a failing Ohio auto plant into a quality operation, using most of the same workers.

Those companies who accepted the quality challenge, found their own reasons to change, and each literally invented a unique quality program that transformed them. Though there were many paths to quality, each successful company established an absolute insistence on performing every activity to the best of their ability, then finding ways to improve even that performance.

To make the quality journey company-wide, it is necessary to convert from Quality Control, where we are concerned with product variability (rejecting defective parts), to Quality Assurance, where we reduce process variability so we don't get bad parts. This approach also brings staff and support functions into the quality effort. They don't produce parts, but they certainly do perform a definable process.

It's fairly obvious that standard cost accounting measurements do not apply to staff and support services. It is also increasingly evident that they alone can't justify spending many resources on production quality. What is needed are measurements that give a better picture of the operating reality. They must demonstrate relationships among many functional areas, not just those within the production line.

To be Continued


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