Measuring the Cost of Quality Management
ECONOMIC CASE FOR QUALITY
Measuring the Cost of Quality For Management by Gary Cokins
T
he quality movement has used the term cost of quality (COQ) for decades. But few organizations have actually adopted a reliable and repeatable method for measuring and reporting COQ and applied it to improve operations.
Is the administrative effort just not worth the benefits, or is there a deeper problem with the methodology for measuring COQ?
What COQ Should Do
At an operational level, quality management techniques effectively identify waste and accelerate problem solving for tactical issues related to process improvement. For many organizations, quality management initiatives have prevented financial losses from customer defections caused by quality problems or from waste and inefficiencies. At a more strategic level, however, has quality management reached an adequate level of support from senior executives? Unfortunately, the avoidance of reduced profits from quality initiatives is not widely measured or reported by organizational financial accounting systems. As a result, organizations cannot easily quantify the magnitude of benefits in financial terms—and the language of money is how most organizations operate. In short, there has been a disconnect between quality initiatives and bottom-line profits to validate any favorable impact on profitability and costs.
QUALITY PROGRESS
In 50 Words Or Less
• Although management prefers to have fact based data and reasonable estimates to evaluate decisions and prioritize spending, financial measurements generally aren’t used to validate quality’s impact on profitability and costs. • Activity based cost/management systems are effective ways to account for the hidden costs of poor quality.
I
SEPTEMBER 2006
I 45
ECONOMIC CASE FOR QUALITY
Why Traditional Accounting Fails
One of the obstacles affecting quality management and other initiatives has been the accounting field’s traditional emphasis on
Measuring the Cost of Quality For Management by Gary Cokins
T
he quality movement has used the term cost of quality (COQ) for decades. But few organizations have actually adopted a reliable and repeatable method for measuring and reporting COQ and applied it to improve operations.
Is the administrative effort just not worth the benefits, or is there a deeper problem with the methodology for measuring COQ?
What COQ Should Do
At an operational level, quality management techniques effectively identify waste and accelerate problem solving for tactical issues related to process improvement. For many organizations, quality management initiatives have prevented financial losses from customer defections caused by quality problems or from waste and inefficiencies. At a more strategic level, however, has quality management reached an adequate level of support from senior executives? Unfortunately, the avoidance of reduced profits from quality initiatives is not widely measured or reported by organizational financial accounting systems. As a result, organizations cannot easily quantify the magnitude of benefits in financial terms—and the language of money is how most organizations operate. In short, there has been a disconnect between quality initiatives and bottom-line profits to validate any favorable impact on profitability and costs.
QUALITY PROGRESS
In 50 Words Or Less
• Although management prefers to have fact based data and reasonable estimates to evaluate decisions and prioritize spending, financial measurements generally aren’t used to validate quality’s impact on profitability and costs. • Activity based cost/management systems are effective ways to account for the hidden costs of poor quality.
I
SEPTEMBER 2006
I 45
ECONOMIC CASE FOR QUALITY
Why Traditional Accounting Fails
One of the obstacles affecting quality management and other initiatives has been the accounting field’s traditional emphasis on