Practical example
Creating transparency in quality-related costs (Total Cost of Quality)
What does quality actually cost?Thisquestion has long been debated in both theory and practice. We regularly hear statements like “We have already achieved a good level of quality; further optimization will only lead to higher costs” from corporate management. The key to success lies in the proper selection of cost items, which in turn determines the success of systematic management and sustainable reduction of quality-related costs. Many of these cost items are not transparent in companies today. This can have significant impacts on the income statement (P&L) and lead to customer dissatisfaction as well as competitive disadvantages. All relevant quality-related cost items within the company should therefore be transparently recorded and regularly analyzed. This was precisely the challenge in a consulting project for a manufacturer in the medical technology and pharmaceutical industries.
Background
- Rising customer expectations and quality standards in the markets
- Significant increase in costs associated with non-conformities (complaint costs, goodwill costs) due to poor product quality
- Suspected excessive testing costs (“Testing quality into the product”)
- Insufficient transparency and a lack of methodology for tracking compliance costs (all costs associated with preventive quality measures, such as design changes made at an advanced stage of development projects)
- Lack of knowledge about the levers and measures for reducing compliance costs and non-compliance costs
Specific task
- Analysis and creation of transparency regarding all quality-related costs in value-added and non-value-added processes
- Identification of the key cost drivers on the compliance and non-compliance cost sides
- Identification of necessary actions regarding quality-related costs within error-prone processes
- Process improvement measures evaluated and agreed upon through business cases to reduce the total cost of quality
KBC's Approach
In the first step, an analysis of quality-related costs was conducted in collaboration with managers from both value-adding and non-value-adding areas to establish transparency regarding available capacity. In the second step, job and task descriptions were used to determine which capacity shares are quality-related and which are not (the analysis is based on the logic of conformity and non-conformity). In the third step, the material cost components were analyzed with regard to their quality-related share. These include costs arising from liability for material defects, warranties, and goodwill gestures, as well as costs for supplier qualification, external laboratory and testing costs, and project costs within the scope of ongoing quality optimization. In the final step, the analyzed costs and their cost drivers on the conformity and non-conformity sides were then presented in so-calledMekko diagrams1. Mekko diagrams have the advantage of providing an at-a-glance overview of how multiple dimensions (here: the individual cost items on the conformity and non-conformity sides) are related in absolute and relative terms.
The analyzed costs provided the basis for a valid assessment of the benefits of specific quality improvement measures. This makes it possible to subsequently determine the overall potential for improvements in the income statement. In addition, the client has been provided with a sustainable method for the systematic analysis and management of its quality-related costs, which can be integrated into standard reporting as part of day-to-day business operations.
1 AMekko chart is a two-dimensional stacked bar chart. In addition to the varying bar heights found in a standard stacked chart, a Mekko chart also features bars of varying widths (Source: https://www.think-cell.com/de/support/manual/mekko.shtml)
