Quality Cost Basics

All organizations measure their costs through one accounting system or another. These systems attempt to quantify and track the costs for the various functions performed in the organization: sales costs, product costs, payroll, and so forth. It was not until the 1950’s that the area of quality costs was addressed in a significant and consistent manner. Until then quality costs were considered part of the overhead of the organization.

When manufacturing firms started quantifying quality costs they found some surprises. Among them:

• Quality-related costs were far larger than had been shown in reports generated from the accounting systems.
• The majority of the costs came from poor quality, but since the costs were hidden in the standards used by the accounting system to measure financial performance, these costs had never shown up as items for management focus.
• The costs related to poor quality could be avoided, but managers did not have clearly delineated responsibility for them. With no management accountability, there was no management control.

Over time – decades of time – the quality community managed to broadly define what was meant by quality costs then to refine the definitions. As the definitions became more effective they also came to define better what to measure and how to measure it to control these costs.

Today we have agreement on four main categories of quality costs. These definitions are quite broadly accepted and have the benefit of being applicable across the broadest range of business types, including those businesses that perform vehicle maintenance as part of or a primary function of their business. These quality cost categories are:

Prevention Costs
These are the costs associated with planning, training, equipment, equipment maintenance/calibration, and process management that help prevent nonconformances (errors) from occurring.

Detection Costs
These are the costs associated with auditing (checking) the process while the process is occurring, then reviewing the results. This is the internal cost of actually detecting any problems with the processes or products before the product leaves the facility.

Internal Failure Costs
These are the costs of nonconforming processes (those that produce errors) and products caught before they leave the facility. They include such things as costs associated with rework, reprocessing and scrap.

External Failure Costs
These are the short-term and long-term costs associated with nonconformances (errors) that get out the door.

Cost ranking by size was found over time to be remarkably consistent, both on a per-occurrence basis and on an annualized basis across many industries. From highest to lowest the rankings were:

• External Failure Costs – Extremely high per occurrence cost that is virtually always higher than other quality cost categories by a wide margin.
• Internal Failure Costs – Extremely high annually, variable on per occurrence.
• Detection Costs – High annually.
• Prevention Costs – Low annually, sporadic expenses.

The quality revolution that started in the late 70s and early 80’s came about when competition forced not merely recognition of these costs but the immediate need for auto and truck manufacturers to address quality as a management priority or go out of business.

As these manufacturers studied their processes and the issues involved in quality improvement they learned many things about the relationships among process quality, quality costs and profitability. One of these was key to obtaining the ROI’s enjoyed today:

Increasing the investment in the prevention of errors and nonconformances reduces quality costs faster and further than the expense of the improvement increases.

The graph to the left depicts this finding. As appropriate quality systems (control systems for error prevention) are implemented, the costs associated with purchasing and operating them rises. The initial purchase price for the equipment and systems is experienced, followed by a low ongoing cost for implementation, maintenance and administration.

Shortly after the implementation of the control systems occurs there is a rapid dropoff in nonconformance costs that far exceeds the combined purchase and implementation costs. This cost reduction is not temporary, it is ongoing. As a result total costs are reduced; the money that would have been expended in correcting nonconformances each month and each year instead drops straight to the bottom line as profit.

Because of the importance of threaded fastener joints to vehicle and vehicle system performance, and the high nonconformance rate and expenses associated with them, implementing appropriate controls to the fastening process has a very high rate of return on the investment.

The following examples drive home this conclusion:

• Vehicle manufacturers are continuously investing in upgrading their torque control systems.
• Vehicles have become incredibly more reliable; warranties are from three to eight times as long as they used to be.
• Fastener- and torque-related warranty claims and lawsuits are far fewer than they used to be.
• The cost to properly install and torque the fasteners is only very slightly higher per unit, and is far outweighed by the reduction in nonconformance costs.

Bottom line – thoughtful and effective investment in proper torque management and the use of correctly-manufactured fasteners results in improved vehicle quality  - which improves profits.

Tenexes Div. of Ryeson Corporation
3203 N. Wolf Road • Franklin Park, IL 60131
Phone: 847/260-2050 or 563/249-4170 • Fax: 847/455-0347

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