ISO 10014:2006 Quality management -- Guidelines for realizing financial and economic benefits: provides guidelines for realizing financial and economic benefits from the application of the ISO 9000 quality management principles; complements ISO 9004 for performance improvements. It provides examples of achievable benefits and identifies management methods and tools that are available to assist with the achievement of those benefits. Quality management influences the economic performance of an organization both in the short and long term. The short- and long-term economic goals should be formulated and regularly reviewed in quality planning.
cost of conformity - cost to fulfill all of the stated and implied needs of customers in the absence of failure of the existing process
cost of nonconformity - cost incurred due to failure of the existing process
Methodology for managing the economics of quality: Identify or review the organization’s processes: identify, monitor and report the costs / identify, monitor and report the level of customer satisfaction / Review and identify opportunities to improve processes and customer satisfaction; cost/ benefit analysis to determine if action is required and if the proposed improvement action is justified, taking into account the short- and long-term benefits. If the action is approved, plan and implement the improvement and monitor the results to give feedback to the process. Repeat this methodology for continuous improvement.
Cost/benefit analysis: ensure that the proposed improvement action is clearly defined, planned and costed in line with the organization’s primary purpose // predict the impact on customer satisfaction by increasing the factors causing delight and satisfaction, and reducing the factors causing dissatisfaction // estimate the increase in revenue due to repeat orders and new business as a result of improved customer satisfaction // identify the less tangible benefits to the customers and other stakeholders // estimate the changes in the costs of conformity and nonconformity, both internal and external to the process;, collate the total financial impact of the proposed improvement action // compare the total benefits with the investment for the improvement action and decide whether to proceed or not.
Cost Monitoring: Costs could include direct and indirect labour, materials, equipment, overheads, etc. // Cost data can be actual, allocated or estimated. // Cost data can be extracted from the existing financial control system, complemented by operational data collection. // Costs that cannot be readily associated with specific cost elements should be estimated.
PAF Model: "Prevention, Appraisal and Failure": The “cost of quality” isn’t the price of creating a quality product or service. It’s the cost of NOT creating a quality product or service. Costs of poor quality (COPQ) – are those costs associated with providing poor quality products and services or those incurred as a result of poor quality. Prevention costs; Appraisal costs; Internal failure costs; External failure costs.
1. Prevention Costs: The costs of all activities specifically designed to prevent poor quality in products or services, The investments made to keep nonconforming products from occurring and reaching the customer, Quality planning costs: salaries of individuals associated with quality planning and problem-solving teams, the development of new procedures, new equipment design, and reliability studies;, Process control costs: costs spent on analyzing production processes and implementing process control plans;, Information systems costs: costs for developing data requirements and measurements;, Training and general management costs: internal and external training programs, clerical staff expenses.
2. Appraisal Costs: The costs associated with measuring, evaluating or auditing products or services to assure conformance to quality standards and performance requirements, The costs associated with efforts to ensure conformance to requirements, generally through measurement and analysis of data to detect non-conformance, Test and inspection costs: costs associated with incoming materials, work-in-process, and finished goods, including equipment costs and salaries;, Instrument maintenance costs: costs due to calibration and repair of measuring instruments;, Process measurement and control costs: the time spent by workers to gather and analyze quality measurements.
3. Internal Failure Costs: The costs resulting from products or services not conforming to requirements or customer /user needs, The costs occurring prior to delivery or shipment of the product, or the furnishing of a service, to the customer, Scrap and rework costs: material, labour, and overhead rework costs;, Costs of corrective action: time spent determining the causes of failure and correcting production problems;, Downgrading costs: revenue lost when selling a product at a lower price because it does not meet specifications;, Process failure: unplanned machine downtime or unplanned equipment repair.
4. External Failure Costs: The costs resulting from products or services not conforming to requirements or customer /user needs, The costs occurring after delivery or shipment of the product -- and during or after furnishing of a service -- to the customer, Costs due to customer complaints and returns: rework on returned items, cancelled orders, and freight premiums;, Product recall costs and warranty claims: cost of repair or replacement as well as associated administrative costs;, Product liability costs: costs resulted from legal actions and settlements.