When Cost Of Quality Goes Up ...

An automobile manufacturing company had stopped production of its X & Y models in three plants for three months during previous year after substantial faulty part incidences. The Company lost the opportunity to produce about 2000 cars each day once the production was stopped. The CEO had asked the Manager Plant Operations to increase the quality efforts for the next business cycle. The Manager Plant Operations was worried as the Company was already being incurring a huge cost on its quality review activities.

The quality problem had been reduced initially after the last year's incident, but the Company started having the same problems again during the current year. The Company was using various quality controls methods but possibly due to high number of input items, complex assembly line and larger supplier base for input items, the quality controlling was proving to be extremely difficult.

A new Management Accountant who joined the Company recently was of the view that cost of quality was being calculated incorrectly on the previous occasions. He started to include man hours spend by the assemblers on an adhoc basis in addition to man hours of quality inspectors to the quality cost. The Management Accountant's logic was 'the assemblers also inspects quality of their own work and do rework before passing it on to the next stage of assembly'.

The Manager Plant Operations became very unhappy with the conclusion as it would mean higher quality costs for him. He approached the CEO with his complaints. He argued that man hours of the assemblers were attributable to the manufacturing cost and quality was a free byproduct of the manufacturing process. Also, he argued against the adhoc method for determining time spent by the assemblers which was allocated to the quality cost.

The CEO was back supporting the Management Accountant's logic. He said that Quality is never an accident, it is always the result of intelligent effort. However, in order to measure the total quality cost correctly for each plant it was necessary to determine how much time the assemblers spent on inspection and repair. So, he instructed the new Management Accountant to send an email to all the assemblers asking them to record the timings henceforth. But, the assemblers were reluctant to reveal how much time they spent on inspection and repair because they were supposed to be able to perform the task properly in the first place, without rework.

The Management Accountant then invited all the Assemblers & Manager Plant Operations at a special meeting held at the head office where he told them to not to fear the facts as hiding from facts is a preparation for failure. He asked, do you all think that if you don't look, the nasty facts will go away. He told that we were also not fair in the last year to not to include cost of business lost of 2000 cars a day for three months to your quality costs. Then with a mild tone, he requested them to allow him for using an automatic stopwatch on the shop floor on an experimental basis for at least three month to do a fact based analysis of Cost of Quality (COQ). Everyone agreed to cooperate in presence of the CEO.

After quality cost of each assembling department had been collected, it become clear that few departments were incurring well-above-average quality cost. The facts provided the Manager Plant Operation the opportunity to achieve substantial quality cost reductions quickly and simply by concentrating efforts on the problem departments. It was realized that Supplier Selection Process was more influenced by price than quality & delivery dependability for many items. The Company also reduced the no. of suppliers and started procuring from single supplier out of the list of approved suppliers who could deliver defect free inputs on time at a reasonable cost.