Concept of Quality Cost: Customer-focused

Earlier, in the Cost of Quality section, we have go through the Juran way of dividing the cost into two type of costs: avoidable and unavoidable. But after the development of Zero Defects and Total Quality Management, managers and authors start to realize that if the Quality is improved enough, the unavoidable cost can also be controlled. A new way of how to divide the quality cost is established. Considering that the Quality cost is part of the Quality management, it is used as a tool for management to identify how to improve quality and optimize profits. So, we can define that Quality Costs “represent the difference between the actual cost of a product or service and what the reduced cost would be if there were no possibility of sub-standard service, failure of products, or defects in their manufacture.” (Jack Campanella, 1990)

To quantify this, Quality costs consist of: prevention costs, appraisal costs, and failure costs. Failure costs can come from Internal or External.

While prevention costs are concerning the costs to prevent low standard products or services, appraisal are dealing with how to guarantee products or services will reach their standards. Both of those costs are usually the additional costs to ensure the product or service quality is in a good place, which are close to the definition of unavoidable costs. On the other hand, failure costs are the cost of defects in products or services, which is the avoidable costs. Each of these branches has their own issues so we need to take a closer look on the impact of Good Quality Costs and Bad Quality Costs.

Cost of Poor Quality

There was a time where managers are the one who decide the quality of their products. If the customers’ demand does not fall within the line, they products are not going to sell. So, they need to improve their quality conformance to fit in with their customers’ needs. This drives the cost of production to a level if they continue their production, they will make no profits whatsoever. This is when top managers start to realize conformance of quality is not enough to achieve profitability.

During the Quality Assurance era, Juran only recognized the true failure cost are coming from scrap and rework and the amount of time needed to do those tasks, so called tangible costs, while other activities are not considered. Those hidden costs, such as labor time, lost sales… are way bigger compared to these obvious costs. Because they are hidden, it is even harder to determine how big the actual impact of those costs is. The increase of these costs can affect the company in both way: loss of sales and higher costs. These two combination can spell doom to the company if it is not being taken a careful look at. So, to minimize the failure costs, management must fully understand their supply chain.

However, understand the problem does not always come with capable of solving one. Tangible costs are visible, so it is possible to calculate the exact expenditures. On the other hand, hidden ones are not easy to measure. So, methods of approximating these costs are developed by Genichi Taguchi (田口 玄) called Quality Loss Function. Let’s look at the function:

Unlike previous Quality gurus, Taguchi approach to Quality is a little different when he disagrees with Crossby’s definition of Quality: “conformance for requirements.” In his own words, he defines quality as “the loss imparted to society from the time the product is shipped.” So, everything related to added value or dissatisfaction are considered a loss of quality in long-term run, and there are always losses which cannot be mitigated. Using the Quadratic Function, Taguchi shown the loss is the area of the region constrained by the Upper and Lower Specification limits and the parabola. This is shown by the nature of the quadratic curve as shown in Figure 8. Loss already occurs when Quality Characteristics is not marching the Target. Compared to the traditional approach, where only defects are accounted, Taguchi’s approach means that even when the product is not considered a defect, it is still causing loss if only the product is made according to target value. This is not the case for the traditional approach, when it only counts defects as the loss of quality, which can be seen with the blue line in Figure 10. Also, the further the product Characteristics (y) from the Target (T), the costlier the product is. And the product can achieve the state of zero losses only when the performance standard reached the state of “Zero Defects”. This is why Quality Loss Function can determine the Quality Hidden Costs since it does not only reflect the common measure failure costs but the hidden costs also.

Another issue that Quality Loss Function can tackle is the variation of acceptance products. The function Quality Loss will be decreased if the variation of the operation is reduced. If firms are not taken are careful look at how to control these variation, and if the deviation from the target keeps getting bigger, the loss will be larger and larger. This is why the drive for continuous improvement of the quality in supply chain are created with the intention to maintain the stability of the operation and increase possible benefits.

To conclude, Taguchi’s philosophy can be summed up by these 4 statements:

·         We cannot reduce cost without affecting quality.

·         We can improve quality without increasing cost.

·         We can reduce cost by improving quality.

·         We can reduce cost by reducing variation.

When we do so, performance and quality will automatically improve.

Taguchi’s Quality Loss Function does not only open a new way to look at Quality Costs, but also explore new dimensions of Quality that has not been exposed yet. The view that Quality is the conformance by Phil Crosby is just coming from his view as a supplier. But how does from customer perspective, what does it look like? To dig deeper, we need to identify what modern Quality is consist of. Besterfield (1998), adapted from David Garvin 1987’s proposal, suggested that Quality can be described by 9 core dimensions, which will be explained in the table 4 below.

The two traditional elements of quality: conformance and reliability are now being included into a bigger and broader framework. Each dimension can be independent on its own, but some are going along well with each other, creating competitive edges if cooperate well. However, a product does not need to excel in all nine dimensions to be called quality product. In fact, it could increase the cost to implement such. Tradeoffs are need to be considered. But still, it is a good baseline to set up new sources of innovation.

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