Establishing transparency in quality-related costs (Total Cost of Quality)
What does quality actually cost? This question has long been the subject of theoretical and practical discussions. We regularly hear statements such as “We have already reached a good quality level, further optimisation will only cause higher costs” from the management level of companies. The success factor lies in the right choice of cost items, which in turn determines the success of systematic control and a sustainable reduction of the quality-related costs. Many of these cost items are not transparent in companies today. This can have a significant effect on the profit and loss account and lead to customer dissatisfaction and competitive disadvantages. All relevant quality-related cost items in the company should therefore be recorded transparently and regularly analysed. That was precisely the challenge in the context of a consulting project at a manufacturer in the medical technology and pharmaceuticals industry.
- Increasing customer requirements and quality demands in the markets
- Considerable increase in the costs of non-conformities (complaint costs, goodwill costs) due to poor product quality
- Suspected overload of checking costs (“Checking quality into the product”)
- Inadequate transparency and lack of methods for recording the conformity costs (all costs for preventive quality measures, e.g. design changes at an advanced stage of development projects)
- Lack of knowledge of the factors and measures to reduce conformity costs and non-conformity costs
- Analysis and establishment of transparency of the entire quality-related costs in the value-added and non-value-added processes
- Identification of the main cost drivers on the conformity and non-conformity cost sides
- Elaboration of the actions needed with regard to the quality-related costs in the context of processes that cause errors
- Process improvement measures for reducing the Total Cost of Quality evaluated by means of business cards and agreed
In the first step, the analysis of the quality-related costs, transparency with regard to the quantity of the available capacities was established together with the responsible persons from the value-added and non-value-added areas. The elaboration as to which parts of the capacities are quality-related and which aren’t took place in the second step by means of activity and task descriptions (the analysis took place on the basis of conformity and non-conformity logic). In the third step the material cost components were analysed with regard to their quality portion. This includes costs arising from material defects liability, guarantees and goodwill, costs for the qualification of suppliers, external laboratory and test costs, as well as project costs within the framework of the ongoing quality optimisation. In the final step, the analysed costs and their cost drivers were then presented on the conformity and non-conformity side in so-called Mekko charts1. The advantage of Mekko charts is that they offer an instant overview of how several dimensions (in this case the individual cost items on the conformity and non-conformity side) are connected at absolute and relative level.
The basis for a valid evaluation of the beneficial effects of the quality optimisation measures defined in terms of content was established with the help of the analysed costs. The total potential of the profit and loss improvements can subsequently be determined on this basis. Moreover, the customer has received a sustainable method for the systematic analysis and control of his quality-related costs, which can be established in the course of company operations within the framework of standard reports.
1 A Mekko diagram is a two-dimensional stacked column diagram. In addition to the different segment heights of an ordinary stacked chart, a Mekko chart also has variable column widths (Source: https://www.think-cell.com/de/support/manual/mekko.shtml)