Quality Cost Performance Measurement

August 28th, 2010

Tags: quality cost, cost of quality, cost reduction

Quantifying the benefits from operations improvement projects is simplified when Quality Cost is one of the key performance measures of an organization’s balanced scorecard.  Quality Cost is actually a financial accounting activity that is often overlooked or goes undone.  The question for your organization is "Why are Quality Costs Not Managed"?

Quality Cost accounting comprises four general categories, namely Prevention, Appraisal, Internal Failure, and External Failure.  To capture details in all four categories is often a daunting task.  Prevention and Appraisal activities are generally percentages of some departments’ overall activities, but not necessarily a specific function, which makes quantification inexact.  Internal and external failures are generally easier to quantify.

Quality Cost management is most effective when it is kept as simple as possible.  Quantify what is generally easy to capture and have the information come directly out of the general ledger.  If the measurement can be simplified the organization gains a powerful performance metric.  How can this be done?

First, focus on just the internal and external failure categories. Examples of internal failure are the following:

  • Overtime, or extra labor
  • Scrap, or waste
  • Rework, or doing things a second time
  • Supplier failures
  • Process losses
  • Downgrades

These costs disappear if the process, or service delivery output is defect free.

Examples of external failure are the following:

  • Warranty charges
  • Complaint adjustments
  • Returned materials
  • Customer allowances

These costs disappear if the process, or service delivery output is defect free after the customer receives it.

The next step is tedious, but only needs to be done one time.  Obtain the general ledger and review the definitions for all line item entries.  The general ledger often contains thousands of entries which makes this a tedious exercise, but one that is eye awakening.  Now use the definitions to identify and classify the ledger line items that fit the categories of internal and external failure.

The final step is to track the internal and external failure ledger line items in a monthly Quality Cost Management report.  Successfully completed improvement projects drive the Quality Costs down.  When the performance measurement tracking is simplified then there is no reason for an organization not to manage their Quality Cost.

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