by Russell T. Westcott

Organizational managers frequently talk about the cost of implementing and maintaining a quality system. Many quality practitioners recall Philip Crosby’s focus on “the cost of poor quality.” Fewer people—those involved with achieving and sustaining quality of processes, products, and services—have given much attention to segregating the three main categories of quality costs: failure costs (internal and external), appraisal costs, and prevention costs. The collective costs of these three cost categories equals the total cost of quality. An all-too-common assumption is that collecting data on more than the visible costs isn’t worth the time, effort, and expense. This assumption leads to an incorrect presumption that a quality cost process is an expense rather than an investment—an investment that should be expected to yield an acceptable return on the investment. Logically, you would not wish to spend more money to identify, collect, analyze, and use quality cost data if to do so would be unprofitable.

A short tutorial is in order. First, the organization’s culture and its management must be concerned about quality cost and willing to support a quality cost process. Second, for a quality cost process to be launched, a preliminary analysis must be done to identify and quantify one or two of the major hidden costs (data not currently available before this analysis), even if this data has to be estimated and extrapolated to a yearly figure. Third, an estimated cost of taking an improvement action is done. Fourth, the estimated return on investment (ROI) for this limited action is estimated and the resulting computation is used to stimulate a management decision to launch a total quality costs initiative. Usually the ROI shock to management will be enough to gain needed approval to move ahead. Over time, add more hidden costs to your process and track the profitability your organization is uncovering.

Envision an iceberg, with its upper section above the waterline, and then think of the failure costs of scrap, rework, and warranty claims, perhaps the only quality costs your organization may already be tracking. Recall that about 90 percent of an iceberg is underwater, so most of it is hidden to human scrutiny. In most organizations, costs such as downtime, decreased capacity, engineering and management time, increased inventory, delivery problems, lost orders, and so on are hidden. It’s likely that your organization has no definitive numbers for these and many of the other hidden costs of quality. You begin to wonder, how are the hidden costs impacting quality and profitability? (Note: Juran’s Quality Handbook¹ lists eleven examples of hidden costs.)

Intuitively, you realize it’s what gets measured that gets attention. Because the myriad hidden costs are not identified—meaning data is not collected and analyzed—these types of costs are not investigated for improvement. Existing financially oriented processes in most organizations do not capture hidden costs. That means designing and implementing a new process to probe the hidden costs—which translates into money expended. Is it worth it, you ask? Find out. Take one of the hidden costs you speculate might be the most prevalent. Set up a study to capture the volume of occurrences of the selected hidden cost within a selected time period. Interview the employees associated with those occurrences to gather the estimated work-time expended to deal with the causes of that hidden cost. Multiply the occurrences times the average corrective/remedial action work time (in hours or days) times the average pay for the classification of individuals involved. Total the estimated costs for the selected time period. Now create a potential improvement process that would address lowering that cost, including the cost of data collection and analysis and potential improvement costs, and compute an estimated ROI as if the improvement process is actually implemented. If your high-priority hidden cost estimates and your investigative and new process implementation costs are conservatively estimated, you should see a substantive rationale for pursuing hidden costs. If you show a ROI as low as $3 to every $1 spent to decrease or eliminate the cost studied, your organization will likely find it profitable to implement a new total cost of quality process (TCQP).

The strategic objective should be to lower the total cost of quality by eliminating/decreasing failure costs (unneeded costs) while adding some to appraisal and prevention costs (needed costs). The premise is: A failure has a root cause. A root cause can be prevented or lessened in its impact. Prevention is typically much less expensive than fixing causes after the fact. Monitoring (appraisal) and reducing or eliminating hidden costs (prevention) is worthy of a systematized process. Failures that occur after the product or service has been delivered tend to be the most expensive to correct and most harmful to the organization (reputation, image, lost business, etc.). Also consider Genichi Taguchi’s quality loss function that addresses product within specification but not hitting the target value—the center of the process.

“Total quality costs are intended to represent the difference between the actual cost of a product or service and what the cost would be if quality were perfect,” says Doug Wood, editor of Principles of Quality Costs (ASQ Quality Press, 2013).² Do not ignore the costs below the “waterline.”

Overall points for internal auditors to consider

• Does the culture of the organization to be audited enable the introduction and adherence to the concept, principles, and practices of a quality improvement process?
• Does top management support the investigation of the feasibility of surfacing hidden quality costs with intent to implement a TCQP when profitability can be demonstrated. Does top management also realize that identifying hidden quality costs and the process to do so will, in a positive way, change how people ranging from management to operators think and act.
• Are the following five objectives deemed feasible for the organization to achieve:
  • Establish a gradually expanding TCQP to identify and decrease the hidden costs of quality?
  • Train all employees in the concept and principles of controlling the total cost of quality and how they can contribute to continual improvement?
  • Continually examine the feasibility of probing for new hidden costs to the TCQP?
  • Continually monitor, measure, improve, and sustain the TCQP?

Suggestions for audit checklist questions

• From available objective evidence (records and observations), what is/are the primary objectives of the existing quality management system (QMS):
  • Ensure customers requirements are met or exceeded, at a value to the customer that tends to develop loyal customers, while also sustaining an organization’s profitability and employing best practices and ethical behavior?
  • Organizational investment to:
    • Continually increase efficiencies and effectiveness of all processes?
    • Continually lower process costs?
    • Continually lower the overall cost of quality?

• Should the objectives be modified?
• Is/or will the TCQP considered part of the QMS? If not, why not?
• What categorical statements describes the existing state of the attention to total quality costs?
  • A fix-it-when-it-breaks mentality from management?
  • Preventive actions are given less attention than corrective actions in the QMS?
  • Management tends to believe that if there are hidden costs, the costs would be more obvious and are probably insignificant relative to profitability and customer satisfaction?
  • Management will be reluctant or will openly resist spending money to design and implement a TCQP, regarding it as an unneeded expense and waste of time?
  • Management feels the present processes for dealing with failures of all types is sufficient and sees no need to add one more monitoring activity?
  • Some more outspoken operations workers have expressed questions about some costs they see but apparently hold no interest for management to deal with?

Further considerations

• For an organization that has an ISO 9001-certified QMS, is the over-arching premise and drive for continual process improvement beginning to slack off?
• In QMS reviews (required for ISO 9001-certified QMSs), are quality cost results discussed and evaluated?
• Does the organization view mistakes as learning opportunities rather than cause for punishment? A positive view is critical to gaining buy-in for a TCQP.
• For an organization that provides technical and process management system assistance to their suppliers, has total quality cost been considered as an additional service to mutually improve supplier material or products and reduce prices?
• If an organization can lower its prices to customers, can a case be made that lowering total quality costs internally would ultimately affect new customers’ as well as current customers’ buying decisions?

Summary

The goal of a TCQP is to focus on achieving an optimal total cost of quality, not eliminate all costs. A TCQP, to be most effective, should not be regarded and operated as a stand-alone function. It should be fully integrated into the organization’s QMS as a sub-system. It’s probably wise for most organizations that have not had experience with a TCQP to implement in phases, perhaps expanding from one or two predominant hidden costs to continually probing for additional hidden costs. This way experience can be gained from improving the process, from contributing to increased profitability, and from enhancing customer satisfaction. This kind of success will help build confidence in the TCQP approach and can provide cost-effective benefits in furthering the program.

Looking to the future, if a leadership change occurs and the focus on direction and strategic goals changes, a TCQP would likely remain in place as a continuing management tool to sustain and improve quality-driven practices. I propose the TCQP approach be initiated through the internal QMS auditing process. Judicious questioning during QMS audits can capture initial data and be used to back up a preventive action suggestion resulting from the audit.

References

¹Gryna, F.M., “Section 8: Quality and Costs.” Juran’s Quality Handbook, Fifth edition, New York: McGraw-Hill, 1999.

²Wood, Douglas C., editor, Principles of Quality Costs, Milwaukee, WI: ASQ Quality Press, 2013.

Additional recommended reading

Westcott, Russell T., editor, chapter 13, section 5, The Certified Manager of Quality/ Organization Excellence Handbook, fourth edition, Milwaukee, WI: ASQ Quality Press, 2014.

About the author

Russell T. Westcott is an ASQ Fellow, certified quality auditor, and certified manager of quality/organizational excellence. He edited The ASQ Certified Manager of Quality/Organizational Excellence Handbook, Third and Fourth Editions (ASQ Quality Press, 2005 and 2014), and co-edited the ASQ Quality Improvement Handbook. Westcott authored Simplified Project Management for Quality Professionals (ASQ Quality Press, 2005), and Stepping Up To ISO 9004:2000 (Paton Professional, 2003). He is active in ASQ’s quality management division and the Thames Valley, Connecticut, section management. Westcott instructs the ASQ certified manager of quality/organizational excellence refresher course nationwide. He writes for Quality Progress, The Quality Management Division Forum, The Auditor, and other publications.

Westcott is president of R.T. Westcott & Associates, founded in 1979, based in Old Saybrook, Connecticut. He guides clients in implementing quality management, applying the Baldrige criteria, strategic planning, and project management practices.