What’s the cost of quality? Can it, like QM guru Philip Crosby argued, really be free?
Like most things in business, quality has a cost that can be quantified. But doing this accurately can be a challenge. It means adding up the money you spend sorting out poor quality outcomes - and the money you spend mitigating quality risks through good quality practice.
How to calculate the cost of quality?
The total cost of quality is the sum of the cost of poor quality (CoPQ) plus the cost of good quality (CoGQ). Or put another way:
TCoQ = CoGQ + CoPQ
Phil Crosby breaks these elements down even further into the internal and external costs of poor quality - plus the combined costs of Quality Control (QC) and proactive Quality Assurance (QA).
In this equation, investment in good quality practice reduces the number and cost of poor quality events, leading to a lower total cost of quality overall.
But the theory goes even further than this. Crosby says if you can achieve ‘Zero Defects’ through the application of good quality, you can eliminate the cost of poor quality altogether. This will, in turn, improve customer satisfaction and drive sales, tipping the balance of the equation to make ‘quality’ effectively free!
What is the Cost of Poor Quality (CoPQ)?
CoPQ is the total sum of associated costs which are incurred due to the failure or absence of the standard operating procedures (SOPs) that are supposed to maintain quality.
For an average company, this CoPQ is said to be about 20% of sales, meaning a company that generates $100M in revenue can waste $20M in addressing poor quality. Even in the highly regulated medical device industry, where there are absolute requirements for continuous process and product validation, McKinsey reckons quality events still routinely cost companies between 6.8% to 9.4% of their total sales.
Crosby breaks down the CoPQ into internal and external failure costs.
The Costs of Internal Failures
If quality issues come to light before a product is shipped to customers, then you may be spared the reputational impact and cost of expensive recalls. But you’ve still got a lot of expensive work to do to scrap and rework affected designs and products, plus undertake failure analysis to see where it all went wrong.
These internal costs of quality include:
- Internal scrappage
- Machinery recalibration
- Failure analysis
- Raw material rejects
- In-process rejects
Depending on the complexity of the products you have designed and the manufacturing process you are undertaking, the costs of failure analysis and corrective action taken can be expensive and time-consuming. The time taken identifying and correcting errors in process can delay the launch of your products, sending a project further into the red and increasing the likelihood of commercial failure.
The Cost of External Failures
External failure costs can mean even graver consequences for a business.
These are the costs of a product failing once it is in the hands of consumers or a defect being missed before it has been shipped. This can mean failures resulting in warranty claims and the cost of issuing replacements. More seriously, it can mean products that could be dangerous to consumers being recalled and fines being levied by regulators. Reputational damage can also impact future sales - inflicting a more long-term ‘cost of quality’.
External quality costs include:
- Warranty claims
- Client penalties
- Regulatory penalties
- Cost of replacements
- End-user legal claims
- Loss of reputation
What is the Cost of Good Quality (CoGQ)?
Set against all this is the “Cost of Good Quality” itself. This is the price tag of the Quality Management Systems you put in place to test for quality in the finished product, while mitigating and preventing issues from happening in the first place.
Crosby breaks these quality management processes down into two distinct cost centres:
Appraisal Costs: Costs incurred checking conformance to quality requirements - aka your QC (Quality Control) processes e.g. testing, inspection and auditing.
Prevention Costs: Costs associated with preventing defects from occurring in the first place. They include expenses related to planning, training, preventive measures and continuous quality improvement.
Together, they represent the total cost of ensuring consistent output that meet required standards. But, preventive costs establish self-sustaining methods of continual process control and validation that move beyond testing to create a ‘culture of quality’ at every level of an organisation.
Modern quality systems need to manage more complex products
Most product development companies will have some sort of Quality Management System in place to consistently meet standards and help them scale without breaking.
But for many, implementing a formal, documented Quality Management System is essential. Some firms must gain quality standards such as ISO 9001:2015 and ISO 13485:2016 to win new clients or sell products in regulated sectors.
Digital Quality Management adds to the CoGQ
As products become more complex and technology cycles become faster, businesses need more automation and control over their quality processes to deliver products with ‘zero defects’ to ever tighter timescales.
Just think about the implantable medical devices integrating software and cutting-edge hardware to monitor medical data and deliver life-saving treatment in real time.
Implementing digital quality systems that are capable of managing these complex design and manufacturing projects can add considerably to the ‘cost of quality’.
The cost of implementing good quality
What are the costs of implementing quality systems?
- Use of consultants to help implement systems and gain standards
- Undertaking internal documentation, process definition, and training
- Appointment of a dedicated quality management team
- Configuring and maintaining electronic Quality Management Systems (eQMS)
- Covering ISO 13485 auditing costs
- Conformity assessment fees
What’s the cost of quality management software?
For rapidly scaling companies, licensing and deploying traditional eQMS software solutions can be expensive and time-consuming. In fact, investing in the wrong platform at the wrong time can sometimes derail a project completely by burdening companies with extra costs and unnecessary process.
Some life-science eQMS software can cost tens of thousands of pounds a year to set up and maintain, with fees added to access extra functionality as a company continues to scale.
‘Heavy duty’ eQMS like these can be demanding in the way they require your business and processes to be organised. They can make you change the way you work to fit in with their SOP templates?
Bought in to help scaling companies impose governance, they often impose layers of unwanted bureaucracy. They can confuse and alienate workers by disrupting the way they’ve worked for years - for no good reason.
In many companies, the software itself is bought and paid for but falls into disuse as staff find ways to ‘work around it’, further adding to the risk of quality lapses.
In these cases, it’s easy to see how a poorly managed digital QMS can become a cost centre that weighs your business down instead of alleviating future quality risks.
What’s the answer?
There are other QMS solutions, however, that can help business deliver good quality in a much more flexible and cost-effective way. These LEAN systems can offer solutions for companies to apply their own unique SOPs, define their own project and product management approach while still offering a robust digital framework for governance.
Introduced early in your design and development process, they can support an end-to-end ‘culture of quality’ in your workplace. One where risk management, design control, testing, verification, validation and continuous improvement becomes the ‘way you do things’ - rather than a set of requirements imposed from above.
When considering the Cost of Good Quality and how it can mitigate the Cost of Poor Quality, the expense and complexity of the eQMS has to be factored in. Some heavy duty Quality Management Systems can act to inflate the cost and burden of compliance so much, that product development stalls before you get to market.
In that Cost of Quality calculation they may never reach break-even point, let alone find the magic balance of velocity and control that can turn process into profit.