#1 Fundamentals of the Total Cost of Quality

The first step in helping senior management view quality as more than a cost is to give them a glimpse of the full extent of that cost.

If your company is anything like the 160 manufacturers surveyed by Gartner in 2022^[5], you only have numbers for the cost of poor quality: the money spent dealing with quality failures that were picked up within the factory or by your customers.

58% of Gartner’s respondents only tracked this.

3% only tracked the cost of good quality, defined as money spent on prevention and/or appraisal.

And only 30% knew—or thought they knew—what their total cost of quality was and could put a figure to this equation:

Total Cost of Quality = Cost of Good Quality (prevention and appraisal) + Cost of Poor Quality (quality failures that were caught on-site or were reported by customers)

And yet even those who think they know what quality is costing them have probably underestimated the true figure. For example, the untracked costs of poor quality can range from hidden reworking costs (such as additional wear and tear on machines and higher energy bills) to the financial impact on brand reputation and customer loyalty.

Your pain as a quality leader—your awareness that things could be so much better—must be translated into financial pain before it can be heard.

All that extra time you spend on ensuring good quality (manual everything, Excel everywhere) because you don’t have the right tools, has a cost. All the extra time you spend fixing poor quality (that might not have occurred in the first place with the proper support), has a cost.

In this series, you’ll learn how to estimate that cost in the language senior management understands. So you can finally deliver the bad news that needs to be heard before things can get better: “If you think our failure costs are high, well they’re higher. What’s more, that figure doesn’t even include our prevention and appraisal costs, which we’re not tracking because we simply don’t have the right tools.”

As a passionate quality professional (you wouldn’t be reading this if you weren’t), you want to get things right. You understand that quality management—as quality guru Philip Crosby put it—is the simple but challenging task of “doing exactly what you said you were going to do”.^[1]

According to Crosby, quality is free because it’s nothing more than the way things should have been done. Investments in prevention—the tools you need to do your job as a quality leader and get things right, the first time—are as integral to the manufacturing process as the machines on the shop floor.

In an ideal world, everyone from the C-suite to sales and production would “get” this. They’d understand that “the way to make products quicker and cheaper is to make them better”.^[2] (That’s from Armand Feigenbaum who formulated the Total Cost of Quality.)

We don’t all live in Crosby’s ideal world (yet), but there is a way to bring it a little closer.

As it turns out, that ideal world, where quality is free, is a reality in certain companies.

Quality becomes ‘free’
(declining prevention and appraisal costs accompany declining failure costs)
above a certain quality threshold.

In a landmark 2016 study (Is quality still free? Empirical evidence on quality cost in modern manufacturing^[3]), researchers in Germany uncovered an interesting relationship between quality improvements and quality costs. As they discovered, “…in manufacturing, ever higher levels of quality are associated with significantly lower quality costs”.

These manufacturers were achieving significantly lower levels of failure costs without significant increases in their prevention and appraisal costs. Once the overall level of quality rose above a certain threshold (90% in this study), prevention and appraisal costs actually declined.

In other words, the higher performers were achieving lower failure rates for free!

How sure were those researchers of their findings?
Very sure indeed:

Given the large sample at hand with its homogenous origin, we confidently conclude that substantial savings in CoQ [Cost of Quality] are possible when reaching higher overall quality levels. The important management implication of these findings is that higher levels of quality do not necessarily require increased spending on prevention and appraisal.

The key to this happy state of affairs—as you’ve noticed—lies in achieving higher levels of quality in the first place. Once there, quality (in the form of lower failure costs) is indeed free.

Which makes sense, when you think about it. To take just one example, while an unstable process requires a high sampling frequency, a stable one allows you to reduce your sampling frequency and lower your appraisal costs.

As you well know, achieving these higher levels of quality depends on company-wide alignment and commitment. It requires a culture of quality where prioritizing quality is simply “the way things are done around here”.

According to Gartner, a culture of quality gives companies a significant financial advantage, with savings of up to $41 million in employee productivity for every 5,000 employees.^[4] And while implementing an QMS doesn’t guarantee a culture of quality, it’s a crucial enabler of one: an indispensable tool in creating an environment where everyone is involved in—and takes ownership of—quality.

It stands to reason that companies that truly value quality are more likely to invest in an QMS. Our own experience with manufacturers ranging from Fortune 500 companies to small and medium entities suggests that an investment in an QMS (ours in this case) leads to Total Cost of Quality reductions of at least 10%. If we assume that the average Total Cost of Quality is 5.09% of revenue (as Gartner’s 2022 survey indicates^[5]), a manufacturer with $100 million in revenue stands to save $510,000 per annum.

Many of your problems as a quality leader can be traced to the fact that the full extent of your company’s quality costs is hidden.

Surfacing your company’s Total Cost of Quality translates the inefficiencies and limitations you’re living with into the language that those with budgetary power understand.

It’s that all-important bridge between what you know is important (quality) and C-level priorities (profitability).

However, getting senior management to meet you halfway requires careful planning.

There will be barriers to overcome in getting your business to adopt a cost-of-quality model.

Gartner’s 2022 Cost of Quality Survey^[5] identified these as the top five:

1. Competing priorities.
2. Concerns about the accuracy of your cost-of-quality data.
3. Disagreements around your definition of the cost of quality.
4. Challenges in communicating its value.
5. The sheer effort of implementing the cost-of-quality model.

In the following briefings, we’ll tackle each of those barriers together.

Our aim throughout is to give you the financial perspective you need to champion quality initiatives effectively. Because when you win your next quality victory, everyone, absolutely everyone, wins.

It’s like in the great stories… The ones that really mattered. Full of darkness and danger they were… Folk in those stories had lots of chances of turning back, only they didn’t. They kept going because they were holding on to something. That there is some good in this world, and it’s worth fighting for.

Samwise Gamgee, The Lord of the Rings

You know you feel this way about quality.

Let’s do this.