Models of Cost of Quality Cost of Quality Model

The identification and application of quality costing can be a very positive driver of quality improvement across an organization, in addition to driving operational improvement, quality costs analysis can also provide direction to the longer term strategic development of an organization. It is clear that quality cost analysis and application is of critical importance to every organization, it is equally important for every business to develop and understand the inter-relationships between the various quality cost elements in order to optimize current and future performance. Every business will have a unique cost model. Development of the cost model will require understanding, analysis and some elements of judgement, however, once developed, the model will provide a clear picture to the organization on the priority areas of focus and the potential opportunities for continuous improvement and strategic advantage.

Developing a “cost of quality” model.

A quality cost model will normally identify the following costs categories – Failure costs, Appraisal costs, Prevention costs and Opportunity costs. Therefore the first step in creating a cost model is to categorize the costs information currently available into each of these categories.  Some costs will be readily available, others may be complete unknowns. Examples of costs which are routinely available will be in-process failures, re-processing costs, supplier delivery failures, product returns. In most organizations the costs associated with failure and appraisal are relatively easily identified, prevention costs tends to be more difficulty to 100% identify and the opportunity costs have a high level of uncertainty and require estimation.

This mix of known and unknown costs will be seen in all quality cost models. In the early stages of model development, the unknown elements may be very high, however, a key benefit of quality cost analysis is that the model with improve over time with increasing certainty over the known costs and falling levels of unknown costs. The development of the cost model will be a continuous activity with increasing certainty and benefit as the model develops, becomes more accurate, drives corrective actions and feeds into longer term decision making processes.

Cost of Quality model parameters.

The model will normally display costs versus time. For example, in the first month of model development, the four costs categories (failure, appraisal, prevention and opportunity) are individually totalled and graphed. Then the same is performed in month two, month three, etc.. As time progresses, trends in terms of each of the costs categories will become evident.  The exercise alone of tracking these costs will help create a focus and drive for improvement.

Cost model development with just Failure or Appraisal costs.

For some organizations, a cost model with just some of the costs categories may be sufficient in the early stage of costs analysis. The optimum approach for a business starting along the cost of quality model approach may be to simply chart the costs which are currently available, then once benefits are seen via a focus on these known costs, the model can then be extended.

Quality Cost analysis and organizational maturity.

As the business implements quality cost analysis and trending, the appreciation, understanding, value and application of costs analysis will become an integral aspect of routine decision making. In a cost model these stages are often referred to as organizational progression from uncertainty, through to awakening, enlightenment and finally wisdom. These phases relate to uncertainty about how to develop and apply a cost of quality model, through to learning and awakening to the process, then as the model is applied and benefits begin to accrue, users become enlightened to the opportunities available via application of the quality cost model and finally, at the wisdom stage the model is firmly established, widely accepted, referred to by management on a regular basis, trends are tracked, etc..