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ISO 9001 Blog

John Nolan

How to measure the cost of quality in line with ISO 9001 principles

If your organization has a functional QMS (Quality Management System), whether certified against the ISO 9001:2015 standard or not, you probably have several KPIs (key performance indicators) that help you understand how you are performing with respect to quality. While these may be specific to your organization or the sector you operate in, do your KPIs truly reflect the financial cost to the organization – when poor quality may cost your company money – even beyond the parameters of the KPIs already measured?

Cost of quality – Why?

The cost of quality can be said to be the definition of time and expenses accrued by an business outside of pre-defined process actions, which need to be undertaken to preserve, improve, or recover the quality of a product or service. The article How to write good quality objectives gave us the opportunity to review quality objectives in more detail. If you consider your own company, many objectives within your QMS will be very easy to define: a manufacturing company might measure “first pass yield” as a critical measure, while a call center might measure response time or customer satisfaction as one of its staple measures. While these may be valid for your business, they also might not tell the whole story.

Product A might fail twice in 100, giving a first pass yield of 98%, and the rework required to the failing part might take 30 seconds to rework and present for retest. Product B might fail once in 100, giving a first pass yield of 99%, but the reprogramming of an onboard component might take six minutes before presenting for retest. Product C might pass manufacturing tests giving a first pass yield of 100%, but field failures and root cause analysis might cost lots of engineering and quality time to fix, and a bill of $10k. According to our staple quality measures, Product B is performing best, product A second best, and Product C worst – but we can see with further investigation that the times and costs we have seen suggest that things might not be so straightforward.

What to capture for your measurement, and how?

To measure the true cost of quality within your business, you need to truly understand your product’s lifecycle, from design and development to end-of-life disposal. You will then have to take the time to understand what the budget to produce a product is, and what times and costs are assigned by your business to support these process steps.

Cost of quality: How to measure it in line with ISO 9001

When you understand this, you can begin to search for the costs associated with your product that are beyond this defined scope. Some examples might be:

  • A product that fails in the field and needs costly rework/engineering time, including carriage and replacement costs. This cost may fall outside the existing quality measures, such as first pass yield or any other in-house product inspections or audits performed.
  • Products that are more complicated or time-consuming to repair or rework than your original budget forecasted. This could mean more costly engineering time, or time spent by your quality team to try and improve product yield.
  • Products that tend to fail more during various stages of the warranty period. Again, your internal KPIs may not tell the story of the cost of replacing, repairing, or shipping replacement product at later stages of the lifecycle.
  • Recycling costs, which can be done according to the ISO 14001 standard for environmental management. The article How ISO 14001 can improve recycling performance looked at recycling, but with ever-increasing legislative requirements ensuring manufacturers have to arrange for return and ethical recycling of product, it is clear that there is a financial cost attached to this.

Picture two scenarios: a mobile phone with an expected lifecycle of 4 years is found to have an average lifecycle of 3.5 years, meaning an increase in cost to arrange transport back and recycle. Similarly, a television set with an expected lifecycle of 4 years is found, on average, to last 3.7 years. Despite the television performing closer to forecast in terms of lifecycle, the sheer weight of product and cost of recycling would erode the profit on the television product range far more than the telephone. This erosion of profit due to a shorter-than-expected lifecycle can be classified as a true “cost of quality.”

What does “cost of quality” tell your business?

Measuring the “cost of quality” for any business requires some very specific knowledge with respect to the processes, people, and products associated with your business. The ISO 10014 quality management standard can provide guidance here, with respect to both improving quality and controlling associated costs.

Establish “cost of quality” as a measurable KPI, find the root cause, and drive improvement accordingly, and you will be well on your way to establishing a competitive advantage in your sector. This is also directly linked to how your business views and takes action with respect to risk, as we saw in the previous article How to address risks and opportunities in ISO 9001. Lastly, understanding how to use root cause analysis to support corrective action in your QMS can be the method by which you ensure that reoccurrence is prevented in the future.

An effective way of driving improvement for business and customers

Finally, measuring the cost of quality can be a very effective way of driving improvement for your business and your customers. Do it effectively and resolve the root causes, and this will surely prove to be a competitive edge for your business.

To help determine the costs of initial ISO 9001 implementation, download this free white paper: How to budget an ISO 9001 implementation project.

About the author:

John Nolan is a Fellow of the Institute of Leaders and Managers in the United Kingdom, and Prince 2 accredited with a background in Engineering and Electronics and Data Storage and Transfer. Having studied and qualified as both a Mechanical and Electronic Engineer, he has spent the last 15 years designing and delivering Quality Systems and projects across many sectors in the UK, including both national and local government.

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