5th Edition PMBOK Guide–Chapter 8: The Cost of Quality


1.  Introduction

The first tw0 of the tools & techniques listed for process 8.1 Plan Quality Management are a) cost-benefit analysis and b) Cost of  Quality.

These tools answer the question:   is the effort and expense put into quality management worth the benefit that it brings to the company?    In reality, answering the question “is quality management worth it” in the abstract is a kind of meaningless question.   The more meaningful question is “at what level of quality to the benefits outweigh the costs?   Do we need the expense of, say, a six-sigma level of quality if we are not producing a product that requires that level of quality?

The purpose of this post is to go into some detail regarding the cost of quality to see the categories that it encompasses.   Understanding these categories will help a project manager now only calculate the cost of quality, but will help that project manager to explain the results to management, if the necessity for the costs of quality management are ever questioned.

2.  Cost of Quality

The two basic categories to understand are the costs of conformance and the costs of nonconformance.   The costs of conformance are the costs of doing quality management.   What if you don’t do quality management?   Then the product that the project is going to create may contain defects, and these defects create costs to the company which are the costs of nonconformance.

Within each of these two major categories are two sub-categories.   Let’s take the costs of nonconformance first.   What if the defects are caught before the product gets shipped out to the customer?   Then the defective product needs to be either a) reworked or repaired or, if repair is not possible, b) scrapped or thrown out.    These costs are internal failure costs.    But what if the defects are not caught before the product gets shipped out to the customer?   Then this means it is the customer who will discover them.   The customer may call the customer call center and complain.  The customer will, if the product is covered under warranty, ask for the product to be either repaired or replaced.   If the customer uses the product and the customer or a third party is injured due to a failure of the product, then the customer may make a product liability claim.    If the claim is denied or the amount offered by the company is not agreed upon by the customer, the customer may seek legal remedy by filing a product liability lawsuit against the company.

No matter how serious the claim, from a call to the customer call center to a lawsuit, the customer will not be satisfied with the company that makes the product, and there is the additional cost of lost future business from that customer.   All of these costs are external failure costs.

What can be done to reduce these failure costs?   That’s where the cost of conformance or the cost of quality-related activities comes in.   You can try to prevent defects from happening in the first place, which is a practice encouraged by the Project Management Institute.   This can be done by designing the product so that the probability of defects is reduced right from the start.   Let’s say the design is done with the idea of reducing the amount of defects.   Then the manufacturing process must also be paid attention to so that defects do not show up there either.   This is where training of machine operators or others involved in the process comes in.   The equipment must be maintained so that faulty equipment does not contribute to defects.   Finally, human resource practices must allow operators the time to do the job right.    Trying to squeeze more productivity out of a worker has diminishing returns at a certain point when a tired operator is more likely to make mistakes, the kind that can create defects in the product.    All of these costs are prevention costs.

Although you can try to prevent defects, you must also have a system in place that will detect defects that may occur during the manufacturing process through a series of tests and inspections which may require destructive testing.   Destructive testing means that the component that is randomly selected, once tested, cannot be released to the customer and must be scrapped.   Obviously this is an expense which contributes to the cost of quality.   These are referred to as appraisal costs.

 

So, in summary:

  • Cost of nonconformance = internal failure costs (rework, scrap) + external failure costs (customer complaints, lost business, warranty, product liability)
  • Cost of conformance = prevention costs (training, quality documentation, equipment, time to do it right) + appraisal costs (testing, inspection, destructive testing loss)

Knowing these categories and being to actually calculate out the costs of quality or the costs of conformance vs. the costs of NOT doing quality (i.e., costs of nonconformance) is the key to being able to explain precisely to management and other interested stakeholders the answer to the question “are the costs of quality management worth it to the company?”

The next post covers the third of the tool & techniques listed for process 8.1 Plan Quality Management, namely the Seven Basic Quality Tools.

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One Response

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