The ‘Cost of Quality’ Approach
For the uninitiated, ‘cost of quality’ provokes the naïve notion that the phrase stands wholly and solely for what it takes to make a good quality product.
But this cost is already known. Part of this is the item ‘Cost of Goods Sold’ or ‘Cost of Sales’ in profit and loss statements. In fact, the cost to make products that meet market criteria for satisfactory quality is already a ‘sunk’ or incurred cost since it embraces direct costs (labour, raw materials, parts) and indirect costs (amortization for the physical plant, machinery, and office equipment, cost of money, manufacturing overhead and indirect labour costs such as for the Quality Control/Quality Assurance staff). In short, the cost to make a quality product ready for distribution is the sum total of all resource allocations and other decisions management has already made to ensure a product that meets minimum market standards.
The real ‘cost of quality’ is the price of having to fix output that does not meet standards or is otherwise not totally satisfactory (ASQ Quality Costs Committee, 1999, pp. 3-5). If a Ford F-150 bears a total production cost of $15,000. every bit of re-work that must be done before delivery to the dealer is part of the cost of quality. A tire that wobbles on test-driving may indicate a sloppily-assembled suspension. A spanner accidentally dropped by a worker worried about losing his job soon means the truck will have to be shunted aside for metalwork, repainting and re-baking. Even the seemingly minor matter of a defective GPS or video player may be covered by supplier warranty but the few minutes’ assembly line delay to replace it is a cost of quality. So is the labor cost to test the finished assembly. If the average cost of quality for this top-selling model amounted to just $100 per unit that left the plant, Ford could see gross margins reduced some $80 million on the production of at least 800,000 trucks annually. That is clearly money taken away from stockholders or foregone when it could have been used to draw down outstanding loans. One shudders to think how uncompetitive Ford would be if the cost of quality were to amount to a thousand dollars per unit or fully one-fifteenth of production cost.
It is easy to think that the cost of quality amounts to just cents if a defective screw is replaced or a few dollars in worker’s wages for a minute’s delay in the assembly line. But the cost of quality has a way of accumulating and mounting for each instance work has to be done over. As well, managements tend to shrug off many elements of quality costs as “part of the cost of doing business.” When a hand or machine tool breaks down before its warranty period or mean time between failure (MTBF), rebuilding it may be entrusted to a service or maintenance unit that is counted as part of overhead. As to the downtime or reduced production this causes, the foreman and production manager already know to put this in the end-month report as one more explanation why the output was below target. Not being strategic thinkers, the two give no thought to whether the breakdown could have been proactively avoided with vigilant maintenance or what the production shortfall does to marginal cost for the plant.
Every bank, utility, brick-and-mortar store, or consumer electronics firm maintains a Customer Service Department. In some cases, Customer Service is part of the “product” purchased, such as when AT&T and Apple Inc. together maintained consumer helplines to teach hapless buyers of the iPhone how to activate their subscription plans. Or when OnStar agents help harried parents track down their General Motors car when a teenage child has absconded with it for a night on the town. But entire CS departments also exist merely to assist irate subscribers complaining about unjustified service cut-offs, billing errors, or bank account misstatements. In such a case, the cost of the entire Customer Relations Department contributes to the cost of quality because it is incurred by quality missteps elsewhere in the organization.
Quantifying by Estimating
Accordingly, the cost of quality is at least equal to the overhead contribution of company departments primarily concerned with finding, receiving, and executing orders for re-work. As alluded to above, finance and quality managers could scrutinize the expense side of the chart of accounts and realize immediately that such items as salaries for the quality department and the production planning, control and metrics staff, cost of goods and disposal for subpar production, and communications or travel incurred to soothe displeased customers are intrinsic to the cost of quality (Berger and Benhow, 2002). The next step is to categorize those expenses according to whether they involve prevention, appraisal, internal failure, or costs incurred externally. When the parts have been derived and the total cost of quality estimated, this is usually expressed as a percentage of revenue.
But even such remediable drags on operating cost still do not account for the total penalties imposed by inattentiveness to quality. The cost of quality also must also count the damage to corporate reputation for reliability. Such erosion of corporate image can lead to disillusionment and brand switching.
Hence, the cost of quality is ultimately reflected in a loss of market share and top-line revenue.
Quality Improvement Tools
Recognizing that cost of quality needs to be measured and that the organization must be committed to it from top to bottom is essential, an outsourced customer relations management (CRM) operation frames quality improvement just like any service firm: there is a ceiling on revenue represented by the cost client companies are willing to pay for outsourcing their CRM operation. There must be sufficient savings vis-à-vis keeping the service in-house and maintaining full control over its effectiveness.
Accordingly, quality goals in such a company must serve business objectives in point of revenue, service levels and efficiency (Bergevin, 2005).
For an outsourced contact center, service level agreements cover client-mandated metrics such as the percentage of clients that should be able to get through to the call queue within, say, five rings of calling up, the proportion that reaches a live agent (and not a recording) with 90 seconds of getting on queue, the number of dissatisfied callers that are able to resolve their problem on their first call, etc.
In this context, process improvement combines state-of-the-art technology, quality assurance, and training agents ruthlessly on vital performance metrics. This means such elements as computer-telephony integration, live QA monitoring of random calls as they take place (or subsequently, by pulling them up from a database of recordings), coaching reviews, and statistical process control.
As well, continuous quality improvement must start early, beginning with hiring conscientious recruits, training them intensively, ensuring perfect hands-on operation, and continuing on to giving feedback as frequently as once-weekly, as well as making sure that the entire company is marshaled to support frontline (Bergevin, 2005).
ASQ Quality Costs Committee, 1999, Principles of quality costs: Principles, implementation, and use, 3rd ed., ed. Jack Campanella, ASQ Quality Press.
Berger, R. W. &. Benhow, D. W., 2002, The certified quality engineer handbook, Milwaukee, WI: ASQ Quality Press.
Bergevin, R., 2005, Call centers for dummies, Mississauga, ONT: John Wiley & Sons Canada Ltd.