money 2 For years leaders, philosophers, and theorists have offered various definitions of quality and the value it has within an organization. Joseph Juran believed quality products and services create a competitive advantage. W. Edwards Deming explained good quality means “getting it right the first time” which implies increasing productivity and reducing costs due to returns, rework, refunds, and waste. James Evans and William Lindsay suggest, “good quality generates satisfied customers, who reward the organization with continued patronage and favorable word-of-mouth advertising” (The Management and Control of Quality 5th ed., Evans & Lindsay, 2002). Ultimately, good quality products and services satisfy your customers, promote your brand, and strengthen your market position.

With all that in mind, you would think that every individual within an organization would be quality-focused and understand the relationship between quality and success.   Every stakeholder would certainly know not only what quality means but also how it is measured and achieved within the organization. However, if that were the case, there would be little demand for black-belted consultants, industry seminars, webcasts, various certifications, societies, discussion forums, and countless publications on this topic. Indeed, if we all knew the price of quality within our organization, at least one of the many discussions planned for the upcoming 2015 PDA Annual Meeting in Las Vegas could be replaced (www. pda.org/conference/2015-pda-annual-meeting/home). The simple fact is when it comes to the value of quality, not everyone “gets it”. One of the reasons why might have to do with how we assign value, or cost, to quality.

So, how do you assign a cost to quality? In my experience, expenses associated with quality can be organized into two different categories: Operating Costs and Remediation Costs.

Operating costs include such things as:

  • training,
  • systems for measurement and data collection and analysis,
  • personnel for quality oversight, analysis, problem resolution, new process, method, equipment or product development,
  • regulatory inspections and compliance audits,
  • equipment maintenance, and
  • other activities associated with preventive measures taken to ensure the product or service meets customer expectations.

Operating costs are proactive investments the company makes to sustain quality within the organization.

Remediation costs are reactive and include:

  • scrap or defects
  • rework or reprocessing
  • refunds, credits, or replacements
  • all costs associated with corrective and preventive actions, including the personnel and systems to facilitate investigations and root cause analysis
  • equipment downtime, supply chain interruptions, service disruptions
  • customer complaints and investigations
  • recalls
  • product liability (fees associated with legal actions)

Remediation costs are losses the company incurs as a result of poor quality. Although indirectly related, the costs of personnel turnover, poor engagement, and low morale could also be included in this category.

Believe it or not, most sources believe remediation costs account for 60-80% of total quality costs.   In many cases, firms add overhead to manage the remediation costs by adding to the operating costs (additional inspection processes or increased data collection).   The result is just a shell game with costs moving from one category to the other in order to address the most urgent scenario rather than driving sustainable process improvements. TCG partners with our clients to classify and quantify their quality costs. We help you identify manageable solutions that reduce costs in all areas while improving overall quality, performance, and profitability.

Do you know the costs of quality within your organization? Do your quality plans include measures that quantify improvement or specify deliverables for cost savings? If you’re not measuring your current quality costs, how will you know when you have reduced them? We would love to hear your thoughts, suggestions, and comments.