Quality Costs

In 1980, I bought a 1980 Pontiac Phoenix.  It was the worst car I ever owned. 

In those days I had a young family, and did minor auto maintenance such as oil changes myself to save money.   But I never changed the oil on this vehicle.  It seemed that every time the car was due for an oil change, it was at the dealer for some sort of repair, so I’d just have the dealer change the oil.

I was so disappointed with the vehicle, that I swore I’d never buy another GM car.  That was 32 years ago, and I’ve kept my promise.   My next car was a Japanese car.  I liked it so much I’ve been buying them almost exclusively ever since.  Can any company afford customers like me?

 Many believe that the cost of a field failure is the processing cost of the repair.  Genichi Taguchi, a well-known Japanese statistician and engineer, once theorized that the cost of a field failure is ten times the cost of the product.  If he is right, companies should spend most of its quality budget on prevention.

Some American managers believe that producing a quality product is too expensive.  I argue that producing a quality product reduces cost.  For a real life example, click here.  The problem is that most companies don’t really know how to measure quality cost. 

In many companies the major component of quality cost is appraisal (inspection).  Management knows what that cost is because it’s easy to measure.  They know how many inspectors there are and the associated overhead. 

There are other costs associated with quality though.   In general there are four areas of quality cost to consider:

• Prevention
• Appraisal (Inspection)
• Internal Failures (scrap & rework)
• External Failures (warranty claims, recalls, customer attitude)

In fact, all but the last cost are relatively easy to measure.  External failure cost or warranty cost is more elusive.  We can measure the cost of the return process – shipping cost, evaluation cost, and repair cost, but we can’t measure the customer’s attitude towards the failure.   Will he purchase the product again, or will he buy from someone else?  Will he share his disappointment with friends and colleagues?  I’ve shared the story above with hundreds of people.  Did any of them select a competitor’s automobile as a result?   Who knows?  Can any manufacturer afford to try to find out?

When considering where to spend a limited quality budget, invest in measurement and prevention.  Measurement indicates the problem areas.  Prevention works in the problem areas to reduce or eliminate them.  As the problems diminish, the costs of appraisal, internal and external failures go down.  The result: higher quality and lower cost.

For more information go to www.rosehillsystems.com